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Start-up Pitch – Essentials

After having looked at around 200+ start-up ideas over the last couple of years, I have compiled a laundry list of areas that a start-up pitch should cover. The answers to these questions should not be a perfunctory one, but an honest one, which should ideally be answered internally before taking up an idea. A “fill-in-the-blank” approach to the pointers below is a sure-shot way to draw a blank. Instead, all these points should be deliberated to clear the clutter, get more clarity and improve conviction to pursue an idea.

As the founder of Spotify famously said – “Ideas are 5%…execution is 95%.”. It’s the execution that matters, nothing else.

So, here we go….. the critical aspects that a start-up should cover while presenting.

The problem that is being attempted to be solved-

  1. Why is it a problem
  2. Scope of the problem
  3. What is the unmet demand that the startup is attempting to cater to
  4. Why no alternatives/substitutes can solve the current problem
  5. What is the Founder-Product-Market fit

The solution to the problem/value proportion –

  1. How the proposed solution solves the problem
  2. Why the alternatives/substitutes are not strong enough
  3. Why should the customer choose your product and how would it delight him
  4. Is it sustainable/repeatable, does it have an enduring solution or how we are looking to solve problems around the current issue at hand
  5. Does the solution improve productivity or help improve revenues for the customer?

Market scoping – size & opportunity

  1. Use the funnel approach to show the market universe, how filtering of customers happens, and what the target market is. All these should be backed by numbers.
  2. Funnel the opportunity through the following for clarity:
    • TAM – Total Addressable Market
    • SAM – Serviceable Addressable Market
    • SOM – Serviceable Obtainable Market
    • The natural rate of growth.
  3. Users – are the consuming users different from paying users? If different demarcate these accordingly while doing the scoping.

Business Model/How it works

  1. The high-level process, that shows the transaction flows summarising the business model.
  2. Specify customer segmentation, if any
  3. How will we grow given our current business model & the efficiencies that we bring in?

What makes our solution unique? Highlight our USP in terms of –

  1. Product, Pricing
  2. Retention, why would the customer come back to us (any programs referral, retention or any other mode- tie-up etc)
  3. Network/Habit creation that is being built. Will it act as an entry barrier for competitors?
  4. IP, Patents if any.

Competition matrix – possible ways to present

  1. A simple matrix with competitors in columns and services in rows to illuminate advantages that we have over others or
  2. Quadrant approach  – quadrant we fall in and how are we superior to other players or
  3. Competitive advantages over others in terms of technology, product, network, experience or any other softer aspect.

Monetisation plans

  1. Are there subscription-based products or commission-based ones? In the case of a two-sided network, specify revenue streams covering users on both sides.
  2. Any cross-sell potential and how are we going to convert it.
  3. Ad revenues/any other forms of revenues that are being explored

Unit economics

  1. What is the profit/contribution per unit of measurement? Revenues minus variable costs excluding marketing costs. Breakeven point. If unit economics is negative, how long would it continue & how would the costs be recovered in the long run.
  2. Highlight various metrics like customer acquisition cost, lifetime value, how the marginal cost of acquiring new customers etc
  3. Modes of delivery of product/solution & the technology behind it – App based/web-based or through other apps

Go To Market/Customer acquisition strategy

  1. Modes of acquiring customers, cost of acquiring under various channels – online/offline
  2. Tie-ups explored & how would these be operational + incentives structure.
  3. Customer retention and reward strategy. How do you lock in the customer?

Traction, if any

  1. Whether any pilot is done and lessons learnt from the pilot, before expanding
  2. Users – classify them as registered users, free users, paying users, time spent on the website
  3. Locations covered so far & the rationale behind it. Tie-ups so far
  4. Metrics on Revenues/Cost/No of customers/Orders executed etc

Growth Strategy

  1. What are the various growth engines & how would we fire them
  2. Product & marketing strategy to achieve growth. Are we taking away market share or trying to create a market.
  3. The key milestone that is to be tracked

Cap table

  1. The current contribution of various founders & percentage they hold
  2. ESOP plans, if any
  3. Funds bootstrapped so far – both debt & equity
  4. Commitments received if any

Funding requirements

  1. What are the funding requirements
  2. How would the amount so raised deployed, break up of likely spends
  3. The time period over which the funds so raised will last
  4. Exit plans offered, if any

Team

  1. Roles of co-founders, brief background relevant to the current venture, link to the Linkedin profile, skill sets that the co-founders bring in, whether these are complimentary in nature?
  2. Same as point 1 above for Key Managerial Personnel
  3. In the case of a single founder, how the key man risk is mitigated,
  4. If co-founders have disproportionate shares, reasons for the same.

Few broader points to be kept in mind:-

The Narrative in the presentation should be supported by numbers/data & underlying business plan. Mention the source of data, if it is an estimate, highlight that as well.

The PPT should ideally be a teaser – while it should give away key pointers, it should also create interest in the audience

The information should be concise, to the point & reinforce the moot point

Motherhood statements are to be avoided. The focus should be micro, while the vision should be macro.

The number of slides should not exceed 25, no agenda slides etc and the flow should preferably in the sequence mentioned below.

PS:- Don’t go by the pitches made by contestants in “Shark Tank”, these are good for theatrics and for entertainment 🙂

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Teaching during Pandemic times

It’s 9 am in the morning. All of us are preparing for my son’s online classes on a war footing – checking if the internet connection is on, the phone fully charged, received invites on multiple apps that we have on our phone – WhatsApp/Zoom/Google Meet/Gmail/GCR (as my son calls it, not a technical term, but an abbreviated form for Google Class Room, just to show his “swag”). You see, unless the invite comes on any of these apps (a mini play of the fastest finger first !!!), the ritual of online classes cannot begin. Oh!! I forgot, it also gets shared on WhatsApp groups, “2C-Parents group” or “2C-Online Classes” or “2C-Friends” or “Zoom-2C”, and at least 2-3 messages pop up that the link has not been received. I understand that every WhatsApp group has a purpose and it is a birth right and duty of parents to be present in all these groups so that they may not miss out on any important updates. The WhatsApp application is designed to be simple, but our life turns complex with these multiple groups.

The ritual of the online class starts with the teacher calling out “Para 2, Page number 10 of English Text book” when we suddenly realise that it is in fact an English class today and have to apply all our just-in-time management skills. We rush to source the workbook and open the right page, just to realise that the teacher has been wrong so we interrupt, just to be rebuked by the teacher, that it is the “text book” and not a “work book”. Another round of expedition to hunt for the “text book” follows and by that time a third of the allotted time for the class is over. (On a side note, I must admit that I am a 40+ year old CA who still does not understand why does one require a separate text book and workbook) We then leave the poor kid alone so that he can win the war of studying through online mode.

After about 15 mins or so, I enter the room, to check on my 7-year old’s attentive skills and what do I see? He was indeed paying attention, totally immersed, lying on the bed concentrating on the ceiling fan’s rotary movement. “What are you doing?!”, I yell at the top of my voice, to which I receive a goat-like innocent look, with a feeble voice saying “I am studying only…?.” Before he could complete his sentence, I shovel down his ears the difference between ‘listening’ and ‘hearing’, the umpteenth time. On another hand, the poor teacher keeps burping out through her mouth, struggling herself with devices, books, a board, a pen and of course, asking for a response from the very student she had muted, trying to elicit a response from a student who has himself muted his mouth, but pretends that his mike is muted.

The rigmarole continues for another 30 odd mins and the most relieved person after the 45 mins odd class is the Parent.  Not because the classes are over, but because now they can catch up on their non-critical, useless, forwarded, WhatsApp messages that they have received in last 45 minutes. By then the clock ticks 10am, for another round of readiness for the next war ..err… classes begins.

Of course, in the melee a doting mother would quietly pass a bowl of Chocos with milk and ask the kid to gulp it as soon as possible after switching off the video. The disciplined father would shout, why can’t the kid get up early and complete his chores. Now one can witness two battles – one between the parents themselves and another student and his studies. The teacher’s elephant like ears listen to the arguments between parents and pleads that the students mute themselves.

It has been tough for the parents (complexity goes up in geometric progression if you have joint family with multiple kids), teachers, kids, school administrator and for all the app developing companies cashing out thinking that this will be new normal.

Let’s salute them, particularly the 50-year-old teacher, who is trying to adapt in this changed environment, evolving like the way Mr. Darwin had explained in the theory of evolution.

But I wish & pray that the new normal reverts to old one – why? So that the bonding of the teacher & student flourish, the bonding between friends at a tender age flourish, and above all the bonding of learning & understanding of the student flourish.

I hope the students do not miss out on small joys of copying & scoring marks.

I hope the never-ending chatter & buzz of the school returns.

I hope the auto/van drivers get their assured monthly income and continue to sort out the fights between the kids while driving.

I hope we never use the words “offline/online” classes and just use the word “classes” alone.

I hope that the school ecosystem can “rise like a phoenix” out of this catastrophe called covid.

Till then, amongst the struggles let’s pretend to learn multi-tasking like the processing devices around us.

How I solved my Son’s mystery in History.

Quizzing me, My 14 year old son, studying in 9th grade asked, why we should study history, what purpose does it serve to remember dates, revolutions, wars etc, ultimately, I think I have to vomit it onto an answer sheet, right?

You see, I am an investor, one who pretends to know all the quotes about a relevant topic & without any hesitation I told him: –

“Those who cannot learn from history are condemned to repeat it”

Not convinced, he asked me for a specific response. Now that I have blabbered something, I have to prove that my knowledge is far superior than his, so I verbatim vomited Yuvan Harari’s view on History:-

“History is not the “study of past”, history is “study of change”. More you think about how things have changed overtime and why, the more likely you will be able to think about how a particular technology or event or anything going to change the future in many possible ways “

What a gas, he thought to himself & asked me, DAD, give me a specific response to the question, and don’t create a narrative.

Now I was in a fix & when you are in a fix, what do you do, quote Munger. Religiously, I parroted what Munger said recently on inversion, and yes, it was about India. :-

“If somebody hired me to fix India, I would immediately say: “What could I do if I really wanted to hurt India?” I would figure out all the things that would most easily hurt India and then I’d figure out how to avoid them. It works better to invert the problem.”

Now what the hell is inversion? Perplexed, not at my knowledge, but about my thriller response, which was like the sky is blue, to the question on what is the color of rose, his contemptuous smile was incessant.

I told him, let me explain. Take for example, the buzz around automobile industry on EV; it is same as that was around solar industry, when it was in its embryonic stage. Lots of expectations, wild projections due to huge potential & only twinkling stars appeared when we looked at the horizon.

What happened then? Well let’s invert & look at history to learn how we prevent EV dream from vanishing in thin air. Tracing back to history, if we focus on few factors that lead to underwhelming performance of solar industry, we can apply lessons from those to realize EV dream.

Inconsistent Regulatory policy: – A stable, predictable regulatory environment is prerequisite for orderly growth. Regulatory intervention, goes against the natural law of change – slow, incremental, gradual & then sudden. Any external intervention changes the DNA of the industry, sometimes damaging permanently, which is what had happened with Solar Industry.

Lack of Infrastructure before roll-out: – Though on paper, there were power off-take agreements but where was infrastructure for last mile grid connectivity. Agreed historically, roads were never built in anticipation of automobile boom, but are the ecosystem supportive enough for infrastructure roll out? This is best explained by chicken egg conundrum.

Too much thrust on clean energy than customer acceptance: – The sudden boom for solar industry was supplemented with a solid narrative in favour of green energy, so is EV. But, what is critical is the acceptance of product by consumers. Why people smoke despite knowing about adverse effect on health…. its product acceptance my dear, nothing else.

Reliance on China imports: – In an effort to ramp up players of solar industry looked for low cost options & resorted to imports. China was happily dumping not just the products, but prices as well. Are we in for a similar game for EV?  Are we ready offer an industry which is 4th largest in the world on a platter to China?

Viability from customer Point of view: – Solar Industry was plagued with the problem of high initial cost & low recurring cost. Similar is the problem with EV industry. How do we move away from opposite of razor business model?

Price of Substitute: – One of reasons growth in solar industry slowed down, was the alternate, cheaper choice of substitute. Price sensitivity is fact of life, which cannot be wished away with. Do EVs have the ability to compete against the price of ICE automobiles?

Unsustainable subsidy program: To address the above two issues, should government look at subsidizing the cost to the consumer & have a cord around its neck? Subsidies programs are like dowry; they keep everybody happy initially, build false sense of emotions and are painful when unwinding is required.

Irrational Competitive bidding: – In a bid have first mover’s advantage & become market leader, players shot themselves not just in their foot, but on others as well. Will sanity prevail as far as the pricing is concerned? Will the race be for market leadership or profits & consequently reinvestment?

Enough!!! he pleaded with his head spinning, but not to give up,  he then questioned, do you think, if these factors are addressed EV is poised for growth?

Again, you see, we investors do not like to give a straight answer, so I replied, with a borrowed quote of course

“If you compare our ability to compare the past with our ability to forecast the future the difference is quite dramatic, I mean we explain the past with greatest of ease and we are really crummy about forecasting the future, In hindsight, the ability to explain the past, gives us the illusion that the world is understandable, it gives us the illusion, that you know the world makes sense, even when it does not make sense, that’s a big deal in producing mistakes in many fields”

Chhod de re baba!!! He said, with sleepy eyes, swearing, he would learn lessons from history, apply them, not in predicting future, but understanding pace of change better.

How I thought, I would run my poultry business & how I ended up.

My thought process began when I saw Mr. Bajaj in Andaz Apna Apna.

https://www.youtube.com/watch?v=xFK3qy0Zvag

I looked at the whole value chain. A Poultry farm business, which will produce 1000 chicken, which will in turn produce 100000 eggs, which in turn will produce 1000000 chickens and in turn many more eggs. I will sell eggs, omelette, and bread for that omelette as well.

I took the above business vision with a pinch of salt & started validating it….. God promise, I did understand the power of compounding. I did use excel spreadsheet for this and was flabbergasted with potential results, the virgin market, the huge runway, etc

In my endeavor to grow my business; I sold chicken on first come first serve basis, some at fair price & some at seemingly unfair price. Because, you see, I read somewhere, that when student (buyer) is ready, teacher (seller) appears.

Just as I was selling, somebody suggested adopting the auction route & tell the world that my chicken would lay gold colored eggs only. I decided to milk the cow..err chicken….There were some deprecating noises, however I ignored the hullabaloo

I included a condition while selling that for every egg delivered by the chicken, the buyer has to pay me a portion of his revenues, because you see I am coloring the egg for you & I need my pound of flesh. The latest fad in business was revenue should be fixed+variable

The buyers, saw the disguised color of the eggs & mistaken it for real gold, bought as many as eggs as possible, by putting in their own money, borrowing from others… mind you only the color changed, not the characteristics. (technologies you see), but were rejoicing.

More the buyers, more the chicken sold, I was glad to discover a great business model. I laughed off at critics telling them I have a unique power of being a market maker & setting the rules of the game. All theories like reversion to mean, invisible hand, will chicken out.

I also sold chickens to few vegetarians. These vegetarians bought the chicken thinking; they may someday sell the egg. The vegetarians thought, we would have to pay, the variable part of the condition only if we sell the egg, otherwise, let the chicken die its natural death.

As the market was flooded with eggs, the prices crashed & everybody selling the egg, played on volumes rather than price In the process, not only the prices fell, even the quality of eggs suffered. The chicken became feeble & consumers complained, but why should I bother?

Then, one day – a wolf in sheep’s cloth came to me to buy chickens. I happily auctioned the chicken, thinking, that sheep would be butchered and other buyers would eventually pay me as per my wishes. I gleefully auctioned whatever chickens was with me

The sheep took off its cloth to reveal the real wolf. I dismissed my apprehensions about the wolf. The lone wolf frightened everybody by creating & setting its own rules, Its philosophy was that the tiger & lion could be more powerful, but I do not perform in circus.

I thought the wolf on the hill is never as hungry as the wolf climbing the hill; the wolf will die down before it ascends the hill. The wolf has completed its ascend on the hill and in the process has made sure all other players die out of exhaustion.

The wolf was not done yet, it quietly complied with the conditions set when buying the chicken, indirectly signalling others to comply. The wolf broke the pack & unknown to me, used me to attacks others, & slowly twisted the knife which someone inserted, not visible to me.

The vegetarians are now caught off guard, they argue that they had just bought the chicken, in case it laid eggs, they would sell. But my morality would not agree to this. The vegetarians have to pay me based on non-egg revenues as this was the condition of my sale.

Few players ran away, few are still bleeding, and few are praying & waiting on their death bed. Oh..what happened to my poultry business? Hmm…. I have egg all over my face & what is left for me is the feces in my farm. I now hope to reorganize my business.

I woke up & I realized this was just a nightmarish dream. I thanked GOD & slept again

ps: any resemblance to telecom sector is purely co-incidental or unintended. I am not talking here about DoT, GOI, telecom players, the non telecom players & the consumers

Thoughts on Long Term Investing

There is lot of literature out there on long term investing, so much so, that after reading tons of material the phrase “long term investing” has become hackneyed.

So, let me try to put the process of generating returns on long term investing in a simple equation:-

R = T + P

Where R is long term returns, T is Temperament of an investor and P is Performance of the underlying business.

While temperament of an investor is internal (prima facie/ideally controllable), performance of a business is something which is external (not in control of investor). Absence of any of these would generate sub-optimal returns.

Many investors factor in the P part of the equation (either self or rely on experts who can plausibly predict), unfortunately, not many are able to crack the T part of the equation, which results in less than expected returns or losses.

The Almighty of investing community – Warren Buffet has said

“Over time, however, investment performance converges with business performance”.

This very much sums up the P part of the equation, so let’s park it aside to validate this at a later date.

In number terms, success or failure of a long term investor can be measured with the returns one generates, but there are no measurable units for psychological aspects of investing – pain, euphoria, short term pleasure, loneliness, stress & anxiety. Hence, the T part of the equation is critical during the whole process of journey – the beginning, the transit phase and at the end as well.

Imagine you want to travel and have a long distance to cover, which can be done through various modes – rail, road, air etc, but you are paranoid about accidents, so you Google up to look at some raw statistics on accidents. After looking at the statistics, you are amused & perplexed that journey by air is by far the safest & has least accident compared to other modes, but accident through this mode can be fatal. It is all the more fascinating that a typical Boeing 747 has around six million parts, failure of any single or collectively few parts could lead to mechanical failure & ultimately fatal accident. At first you dismiss this fact, but as you dig deeper you find this is true, so you start applying lessons from this on your investing journey, after all everyone wants to avoid financial accidents.

You (the investor) are now a pilot of a plane and you have been given a command to steer a plane, the conditions for flying are apt – the runway is long (huge untapped market), there are favorable tailwinds (regulatory push/industry in growth phase), clear visibility (near term good demand) & you are aware of the flight path (strong sustainable moat). In short, every factor is conducive for flying. Now let’s invert to see what the chances that an accident can occur.

The first data point on air crash that you look at is that around 80% of the accident happens during takeoff or landing (https://www.1001crash.com/index-page-statistique-lg-2-numpage-3.html).  Same is with investing, while a wrong entry point makes for a failed take off and a wrong exit can cut profits. An entry at the peak of valuations is a sure recipe for disaster. A bloated balloon is always at the risk of bursting first. Always reach out for a balloon with adequate air. Many retail investors enter into a stock, by looking at how much it has fallen recently without looking at the reasons behind this. They are ready to catch a falling knife and eventually bleed later. A temperament to resist such temptations is critical.

The second data point you look at is airlines typically have a standard checklist before flying. These checklist ranges from the physical aspects of the plane, to the fatigue factor of the pilot and adequacy of fuel to run the plane. Just as a pilot of a plane is important, so is the management of a business. This has to be an uncompromising check. A plane without adequate fuel to cover more than the planned distance is like an investor investing without adequate margin of safety.

The whole process of checklist can be time consuming, demanding lot of patience and more importantly requiring you to apply negative thought process of what can go wrong. Every investor has to go through this motion consistently & repeatedly to avoid a crash. The consequences of any deviation from this checklist would be know later and could be disastrous, so as a rule make sure you mandatorily go through a checklist before investing. Adhering to a checklist could be mentally draining and fatigue could set in due to the routine nature of the process, but there is no substitute for this.

There are very remote chances of a plane meeting with an accident in a cruise mode. The pilot of a plane gets early warning, when there is a mechanical failure while flying, it is up to the pilot to either ignore or react to such warning and steer the plane to a landing where the objective is to reduce losses as much as possible. So is the investor’s choice to react to warnings that the market throws up. The temperament to assess the situation and react accordingly differentiates the outcome.

Just as a pilot is prepared for and to deal with turbulence, an investor also needs to be adequately prepared for turbulence in an investing journey. There cannot be a better write up on turbulence in an investing journey than this write up by Vishal Khandelwal at https://www.safalniveshak.com/buy-and-hold-simple-not-easy/

To sum up, learning theoretical lessons on swimming is very different from actual swimming. Anybody can ace a written exam on swimming, but few can swim like a fish. The theory of investing is far, far different from practice of investing. You can read tons of books on long term investing, but practicing is far more difficult. An individual can become a Warren Buffet Bhakt by reading tonnes of books, but he may not make returns, which typically a value investor makes, if he does not have the temperament to accept the vagaries of the market.

Time machine of a 40 year old investor

The other day, I overheard a group of young, bubbling 18-20 years old discussing about investing in general and how stock market is a casino – a perception which unfortunately many share – both who have experienced investing and those who have not. 

My 14 year old son is mad about Avengers & explains me in detail how a time machine was deployed to save the world from further destruction after everything has been lost. This propelled me to deploy a time machine on my investing years & see whether I can save myself from any possible future destruction, because after all we live, one life and there are no known sequels. I decided to write a small self-note to a 25 year old me from a 40 year old me.

“The first principle is that you must not fool yourself and you are the easiest person to fool” – Richard P Feynman

With this quote in the background, my armored brains pushed the button on my time machine and behold the very first scene I see is blood on my hand.  Picture this, a 25 yrs old young lad, sitting at brokers’ office, with noise from the traders, the divine TV channel signalling to buy, offering a ride on a FOMO bus, bombarding with flash news & throwing multi-period one way price-graphs reaching till Mt. Everest.  Why will not a sane yet inexperienced monkeyed mind think that it has been placed at a different pedestal to pluck a low hanging fruit? Mr. Market was full of generosity, wanting me to make money, in the easiest, simplest and fastest way. Within 15 minutes of placing an order for buy, the divine blessing moved away and I was left to pray the real Divine God to save me from losses. The very first trade was a big red inverted bar on my investing graph. End result, I lost money, but not the message. I stopped short-term trading in the short term, because sometime we need to be thought hard lessons repeatedly, similar to a carpenter hammering a nail – initially with slow soft blows & then with brute force. Over time, I realized the true meaning of weapons of mass destruction, when I traded in equity derivatives. The after-effect could be multi-generational. I learnt lessons on the fallacy of short term trades after lot of hemorrhaging & eventually hammering.

For a prolonged time, The Time Machine stopped working, sulking & then taking me to a few “off market experts”, who had pocketful of tips, not in their pockets, but up on their sleeves. In a flash, somebody appears and tells me how he made huge money by following inputs from some of these “off-market experts”.  Seeing is believing, proof of pudding is in eating, power of serendipity – lot of such phrases/idioms were thrown at this idiot who was the guinea pig similar to the innocent participant in Asch Conformity studies. (more about the experiment can be seen at https://youtu.be/sno1TpCLj6A) The initial reluctance gave way to social proofing (interesting video at https://youtu.be/MEhSk71gUCQ) and after few profitable trades, micro losses became macro due to loss aversion & over time, initial denial thoughts met with stark reality. I concluded, albeit temporarily, profiting from investing is more of luck than a skill.

The Time machine was linear, till I eyed cyclical stock.  I metaphorically, saw the London Eye in front of me and the clichéd, simple, no-nonsensical quote flashed – “buy low and sell high”. Where else, can you see higher highs than in cyclical stock? I thought to myself, nothing less than a multi-bagger through cyclical stocks will help me ride my profiting wave, but it so turned out, in hindsight, I was at the wrong end of the cycle & the fall from the top was slow and then sudden. I realized that the one needs to have a complete grasp on the information to be on the right side of cycle & mere increase in stock price due to a company’s product price increase, without increase in capacities is speculation. Despite this experience, my aspiration to make money from stock market did not get punctured though.

Just like the movie “Inception”, the Time Machine took me to another flashback zone, 5 years post the dot-com bust, a period which saw largest IPOs of its time in India, where investors lined up to subscribe given the plethora of offering. One such offering was from a market leader from the stable of well known ethical business house. I bet on this horse (stock), whose jockey (management) was known for a fair play, in for the long haul and had reputation for sharing the jackpot in the past. The horse had a slow start, had to bleed for sometime due to injury, had periods of relative non performance and then it galloped leaving behind other horses. The jockey remained lean & never took heavy load (no debt), had put blinders to focus on growth, riding through different turfs & weather conditions. One may attribute & use any adjective to describe this bet as skill, luck, timing, temperament, ignorance, etc., but I did ride the wave. The powerful mean reversion was at play frequently. Oscillations in price were in line with business performance. Investing was unexciting, boring, quiet, less anxious, but consistently rewarding.

Along the way, the Time Machine taught me good lessons on valuation, while numbers matter, what matters most is integrity of the management, not just at the time of investing, but throughout investing journey – there is never a single cockroach in the kitchen. A 90% fall in price is preceded first by 80% fall and then by a 50% fall. Valuations based on various metrics are of no use if intent & capacity of the management is an issue. Multi-point valuation is like a four seat chair, each of the leg has to be equally strong. A low PE stock need not be attractive; a low price to book value need not be on account of non discovery of value (typically holding companies); looking at ROE, ROCE in isolation can lead to wrong conclusion; EV/EBIDTA does not reveal extent of indebtedness & reinvestment in the business. Numbers after all can help create a narrative and narratives can be retrofitted with numbers. Complex excel file models are like a groom before a marriage, all decked up, beautiful, confident & in a misplaced comfort zone, only to realize, that the ground reality post marriage (after  investing) is far from the truth.

Flash-forward, before my fatigued Time Machine’s batteries dies out, it flashes a Charlie Munger’s quote, which is so profound & timeless

 “All I want to know is where I’m going to die so I’ll never go there”

Let me take a break now to recharge my Time Machine and see, if it can be taken 15 years forward. Till then, enjoy reading, enjoy investing !!!!

Long Distance Running and Investing in Equity

I have been investing since I was 26 and took up active running when I was 35. The compulsion to start though was different, in case of investing, an unexpected investment opportunity & in case of running an early warning signal about my health. The most important & basic need a human requires is a good health & a decent wealth. Many of us realise the importance in the absence of it and very few of us concisely nurture it.

When I look back, I am really surprised at the similitude. I began both the journey with accidents (a financial loss & an injury), not fatal enough. Luckily, the initial accidents showed me the door to the secret sauce of success – Long term. Some similarities have not only helped my financial health, but physical as well.

It’s all about emotions:-

Higher investment returns = EQ > IQ.

Long Slow Distance running = EQ > Physical strength

In investing, more than IQ, it is the EQ that is important, as is the case with running, more than physical ability; it is the emotional strength, which determines if we are able to achieve our targets.  Beyond a certain distance, the body, legs, hands would move at a certain rhythm unconsciously, as is the case with investing, the compounding effect kicks in.  Running is more in the mind, than in legs, investing is more in behavior than in the price movements. A runner craves to get into a meditative state and an investor craves for wealth creation and not just income.

Philosophy:-

Key to returns on peaceful investing is having a clearly defined philosophy, boundary lines & realistic returns. Key to running long distance is being aware of one’s ability in terms of distance covered, speed & time taken. All the three aspects in both the cases need to be triangulated, for appropriate goals. One needs to be grounded (literally & figuratively) in terms of expectation, awareness of limitations & being patient.

Obstacles:-

Every runner (investor) faces same or newer obstacles during every new run (stock pick), be it weather (market conditions), injury during the run (price movements) availability of hydration (information availability & processing), uphill/downhill run (temporary loss of capital/swings), damaged roads (few quarters of bad results), loss of mental strength (opportunity loss) & most importantly starting troubles (management quality). Best way to overcome these is to be better planned before the run (thorough research), assess & know key aspects that can be taken in stride as you run (risks & mitigates) and most importantly know when to stop &/or complete the course (know when to sell) at the beginning. A seasoned runner or a seasoned investor would give 80% weight-age to planning, 20% to the execution & 5% to the successful completion. The end result seen by outsider both in running & investing is like the top end of an iceberg, nobody gets to the depth of it.

Coat-tailing:-

Many of the retail investors believe in coat tailing, akin to surfing on another investor/institution’s wave, without realising that the latter constantly wins small battles in his mind to win a war. Unlike the latter’s investments, the small battles and the responses to those are not visible, what is visible is the result, with a lag, by then the water recedes & nakedness is known. Like in running, investing is also lonely, the sufferings, celebrations, the runners high (losses, profits, belief) are of the individual who is experiencing it, and rest is all irrational exuberance. While fellow runner’s support can give an emotional boost, a runner alone has to complete his journey, as with the case of an investor. It is near impossible to run & invest coat-tailed with same results, period.  However, like smart investors, who network and keep ear to the ground, a network of good runners can help build & reinforce conviction. The second order benefits of running in a group is understated as is the strength of an investor’s network.

Back loaded results:-

The results are always back-ended. While short term returns and a quick run can give you a temporary boost to your dopamine, they are always fraught with risk of long term damage either psychological (aversion to stock market) or physiological (injury).  For best results, a steady run (consistent performance), proper hydration (knowledge), and awareness of basic underlying strength (conviction) is must. Short term investing is like running on a treadmill, it gives you high & seemingly good returns, but the associated costs dent the returns & have long term negative impact. Over long term, the compounding & confidence booster engine work more efficiently in investing & running.

Conviction building:-

Conviction building in running is as important as conviction building in investment. A constant self-doubt without contrary evidence (lack of confidence despite practice), worrying about fellow investors profits – rabbit breed investing vs. Turtle investing (faster runner vs slow runner) will surely cut short an investing journey. Every run is unique experience, as is every investment. These cannot be replicated.

It is said; bleed in peace, so that you sweat in war.

Practice for timing, practice for distance, practice for terrain & practice for self confidence, is the path to likely success in running.

Company research, Competition/Industry research, Scuttle-butt research & Value Investing is the path to likely success in investing.

There will be days, when your intended goal of running is not achieved, but do not give up on as its rub-off benefits are immense & contagious (snow ball effect), as is the case with wealth creation through equity.

The acceptance of fact that there will be few years of bad run for your investment, but over a long term it generates higher wealth, mentally prepare one from the pangs of investing.

Sounds good so far? Where do I start now? Take baby steps, break the shell & slowly blossom, more importantly enjoy the process and not worry about the outcome.