Sunday, April 12, 2015

Envy in the driver’s seat

“It’s not greed that drives the world, but envy.”
Warren Buffett

Envy is an emotion triggered in a person when she or he thinks that another has something better. Envy can cause a series of wrong decisions and make investors do things that are completely irrational. During the pre Y2K dot com boom several investors made lots of money on technology stocks. Companies with very large negative margins were valued at billions of dollars. It was said that a man with an idea could be funded with millions. At this point Buffett clearly said that he did not understand technology and thus wanted to stay away from it. It was probably Buffett’s control on his envy that enabled him to stay away from this potentially disastrous trade. During the ensuing dot com bust he got several opportunities to buy lots of cheap high quality moat businesses.

Even in today’s day and age several companies with negative earnings are being given Billion dollar valuations. Take the example of Flipkart. The company is supposedly valued at 15 Bil USD or 90K Crore INR! Now it is difficult to justify that valuation when the profits are negative. Apparently the revenue of the company is 4 Bil USD. Now for the 15 Bil USD valuation to be true by 2020 the profits should at least be 1.5 Bil USD. Even if the revenue then is 15 Bil USD profit after tax is unlikely to be 10%. That said in order to gain that revenue the company will have to keep undercutting its competition because the competitive advantage in the internet sales game is typically price and awareness of the website. There are many players in the awareness game and many more to come. What is really the moat here?

Now imagine if you get green with envy over the fact that Tiger global can buy Flipkart stock while you cannot. You could go out and buy the Justdial stock at 74 odd times earnings or could wait for the Flipkart IPO next year. Does that mean you will make money too? Probably not unless the company actually starts turning a profit. Even Amazon trades at a 172 Bil USD market cap without much profit relative to the invested capital. So you could argue that this irrationality will continue.