Financial Guru- Your Protective Mentor in the Financial Jungle

07/12/2024

Myth 1: A Low PE Ratio Means the Stock is Undervalued
Reality:
While a low PE ratio can indicate that a stock is undervalued, it might also suggest issues such as declining earnings, poor management, or a troubled industry. It’s crucial to look deeper into why the PE is low.

Example:
Company A has a PE ratio of 5, much lower than the industry average of 15. Investors might assume it’s undervalued. However, on investigation, it’s found that Company A is facing declining revenues and increasing debt, which justifies the low PE ratio.

Myth 2: A High PE Ratio Means the Stock is Overvalued
Reality:
A high PE ratio doesn’t necessarily mean a stock is overpriced. It can reflect strong growth potential, brand value, or market dominance. Growth stocks often have high PE ratios because investors anticipate higher future earnings.

Example:
Company B, a technology firm, has a PE ratio of 50, much higher than the industry average of 20. Despite this, investors see it as a leader in AI development, with revenue expected to grow exponentially. Thus, its high PE reflects future potential, not overvaluation.

Myth 3: PE Ratio is a Standalone Indicator
Reality:
The PE ratio alone is insufficient to judge a stock. It must be combined with other metrics like PEG ratio (Price/Earnings to Growth), dividend yield, and qualitative analysis to provide a comprehensive view.

Example:
Company C has a PE ratio of 10. However, the industry is growing rapidly, and its competitors have an average PEG ratio of 0.8 (indicating growth potential). When analyzing further, it’s revealed that Company C’s growth is stagnant, explaining the low PE ratio.

Myth 4: PE Ratio is Always Comparable Across Industries
Reality:
Different industries have varying average PE ratios due to differences in growth potential, risk profiles, and capital intensity. Comparing PE ratios across unrelated sectors can lead to incorrect conclusions.

Example:
Company D (a utility firm) has a PE ratio of 12, and Company E (a biotech startup) has a PE ratio of 35. Comparing the two would be meaningless since utilities are stable and slow-growing, whereas biotech firms are risky but offer high growth potential.

Myth 5: PE Ratio Reflects Current Performance
Reality:
The PE ratio often uses trailing earnings (past 12 months) or forward earnings (expected future profits). These numbers can be outdated or speculative, so the ratio may not accurately reflect current performance.

Example:
Company F's trailing PE ratio is 18. However, its latest quarterly report shows a 40% decline in earnings due to market disruptions. The PE ratio doesn’t yet reflect the recent downturn, giving a misleading impression of stability.

Myth 6: All Companies Have Meaningful PE Ratios
Reality:
Companies with no earnings or negative earnings don’t have meaningful PE ratios. For such firms, alternative metrics like price-to-sales or EV/EBITDA are more useful.

Example:
A startup, Company G, is in its early stages and hasn’t achieved profitability yet. Its PE ratio is "N/A" because its earnings are negative. Judging its value requires different metrics and an understanding of its growth prospects.

Myth 7: PE Ratio Reflects the Quality of Earnings
Reality:
The PE ratio doesn’t account for the quality or sustainability of earnings. Earnings could be inflated due to one-time events or accounting adjustments.

Example:
Company H has a PE ratio of 8, which looks attractive. However, its latest earnings include a one-time gain from selling assets. Excluding this gain, the PE ratio would have been 15, showing that the stock isn’t as undervalued as it seems.

Conclusion
The PE ratio is a valuable tool, but it’s not a magic number. Investors should combine it with other financial metrics and qualitative analysis to make informed decisions. Always consider industry context, growth potential, and the broader financial landscape before drawing conclusions based solely on the PE ratio.

03/10/2024

26/09/2024

Cheat Sheet

31/10/2022

✍️ *22 FINEST PEARLS OF FINANCIAL WISDOM!*
1) Bonds are for storing wealth and equities are for creation of wealth.

2) In my opinion, the biggest asset one can have is zero debt.

3) The greatest discipline in personal finance is living below your means.

4) As Ben Carlson says, emotions cannot be back tested. That’s why past bear market always looks like opportunities and future ones scary.

5) Early financial independence and early retirement are completely different. To me, the former is a blessing and the latter is a curse.

6) Don’t think how it would have been if you’ve started 10 years ago. Start today and visualise how you would feel 10 years from now.

7) The neighbourhood we live determines our life style & spending. Need to be careful in choosing one which matches our goals and personality.

😎 Paying minimum balance regularly on credit card is the maximum sign that you’re getting into debt trap.

9) Many are long term investors till the next bear market.

10) Don’t take aggressive bets. Take measured risk. Remember one blunder can push you back by a decade or more in terms of wealth.

11) Big money can be made through high savings, wise investing and lots of patience.

12) One sign of progress in an individual investor’s portfolio is no churn or very less churn.

13) Trying to get rich fast is a foolproof way to lose what we have.

14) Losing opportunities is far better than losing money. Don’t invest in fads.

15) “Making as much money as quickly as possible” is not an investment strategy. Unfortunately for most of us that is the strategy.

16) Aggressive strategy cannot be a substitute for high savings. Save high and take moderate risk than saving less and taking high risk.

17) The day we realise not losing is as important as winning; we would stop blindly chasing returns.

18) Good periods are more than bad periods. By not timing, though we go through bad periods, do not miss even a single good period.

19) We’ll stop looking for quick money the moment we consider stocks as businesses and realise that our wealth grows in line with business growth.

20) There are periods of high returns, low returns, no returns and negative returns. We need to go through all these to get long term returns.

21) Listening to market forecasts is not only useless but can be very harmful too; if you start acting on them.

*22) The hard truth is only around 3% of our population are in a position to aspire for financial independence. Don’t waste this rare privilege.

💐💐💐💐💐💐💐💐💐💐

11/10/2022

's hitting new lows ⛔✴️👇

Currently down 40-60% from its life time high.

Medplus
Policy bazaar
Shriram Properties
PayTM

Not every bet is rewarding.
New co's takes Time to create wealth.

06/09/2022

29/07/2022

Conflicts related to money are among the most common between kids and parents. Here's a look at those conflicts, plus tips for getting ahead of them.

19/12/2021

11/05/2021

4 great investing lessons from Peter Lynch

1. All your stocks will not do well

You only need a few good stocks in your lifetime.

If you have a lot of stocks, some will do mediocre, some will do okay, and if one of two of them goes up big time, you produce a fabulous result. Some stocks go up 20-30% and investors get rid of it and hold on to the dogs. It is like watering the weeds and cutting the flowers. You have to let the big ones make up for your mistakes.

If you looked at 10 companies, you'd find one that's interesting, if you'd look at 20, you'd find two, or if you look at 100, you'll find 10. The person that turns over the most rocks wins the game.

In this business if you're good, you're right 6/10. You're never going to be right 9/10. This is not like pure science where you go, "Aha" and you've got the answer. You have to take a little bit of risk.

2. Don’t get easily afraid

The unwary investors pass in and out of three emotional states: Concern, Complacency, Capitulation.

Concern after the market has dropped or the economy seemingly falters. This is a hindrance to buying good companies at bargain prices.

When the investor buys buys at higher prices, complacency sets in because the stock price keeps rising higher. Ironically, this is the time when one should be cautious, and fundamentals checked.

Finally, when the stock crashes to prices below the buying price, the investor capitulates and sells in a snit.

Such investors fancy themselves to be long-term investors but only until the next big drop, at which point they quickly become short-term investors and sell out for huge losses.

People who succeed in the stock market accept periodic losses. Calamitous drops do not scare them out of the game. The trick is not to trust your gut feelings, but to discipline yourself to ignore them.

3. Researching fundamentals will help keep you grounded

Invest in a company after you have done the homework on the company's earnings prospects, financial condition, competitive position, plans for expansion and so forth. Stand by your stock as long as the fundamental story behind it has not changed.

(The year 1982 was a very scary period for America. Recession. Inflation at 14%. The prime rate was 20%. The economy was apparently in a free fall. One of Fidelity shareholders wrote to Lynch and questioned: "Do you realize that over half the companies in your portfolio are losing money right now?" Lynch answered: "These companies are going to do well once the economy comes back. We've got out of every other recession. I don't see why we won't come out of this one." He was proved right. The market eventually went north.)

Don’t look at economics to predict the future. If you spend 13 minutes a year on economics, you've wasted 10 minutes. Focus on your companies. If you own auto stocks, you should be very interested in used car prices. If you own aluminium companies, you ought to be interested in what's happened to inventories of the metal. If your stock are hotels, you research should lead you to find out how many people are building hotels. Deal with facts, not forecasting the future. That's crystal ball stuff. That doesn't work. Futile.

4. If you think you can play the market, you will get played

People who are no good at picking stocks are the very ones who say they are “playing the market,” as if it is a game. When you “play the market” you are looking for instant gratification, without having to do any work. You are seeking the excitement that comes from owning one stock one week and another the next. “Playing the market” is an incredibly damaging pastime.

The public looks at stocks differently than they look at everything else. When they buy a refrigerator, they do research. They spend weeks planning a trip and hours studying their frequent flier plans. When they buy a microwave oven, they do research. They’ll get consumer reports and ask other individuals on what they favourite kind of oven is or what kind of car would they buy and why. But they will invest $10,000 in some zany stock that they heard on a bus on the way to work. And they do it before sunset with no clue what the company does. And then wonder why they lose money.

This is sloppy and ill-conceived. More often than not, they are chronic losers with a history of playing their hunches.

In the end, they are more convinced than ever that investing in stocks is a game, but that’s because they have made it one.

Content source- Morningstar