The narrative becomes important in the absence of earnings
When earnings go missing, narratives get created to justify valuations. This has been the story of startups and IPOs of so-called new-age companies. Valuations in private markets are justified by what investors paid before and are lining up to pay in the future. Valuation for a company is based on two components - I) intrinsic value and ii) transaction value. In private markets, transaction value is high because of perceived scarcity.
In this article, Jamie Catherwood argues that the one advantage that these unprofitable companies arguably have is that without existing profits, it’s impossible to compare the practicality of future profit projections.
In Simple Principles of Investment, published in 1919, the author joked: "If there is nothing to compare, there is nothing to criticize."
It's Supposed To Be Hard
It is very difficult to write better than Morgan Housel, so I will just quote him from this article.
Every investor knows, or should know, the truth about money management: More than 80% of professional investors underperform their benchmark (more depending on how you calculate it). Those stats are used in an often cynical way to show how the industry is broken, crowded, and ineffective.
But wouldn’t it be weirder if it were different?
Wouldn’t it be strange if every slightly ambitious investor could pick a few stocks and earn returns capable of generating dynastic wealth with other people’s money? Or even most of them? How and why could that world possibly exist? The reason Warren Buffett is interesting is because there’s only one of him.
The thing to keep in mind is that in any endeavor that has the potential to deliver big rewards, the best you can do is put the odds of success in your favor, which means recognizing that if you make 100 attempts at something, 99 of them might be failures but one might be an enormous win.
Quote of the Week:
“Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand— you must learn to handle mistakes and new facts that change the odds.”
~Charlie Munger
Audio/Video of the Week:
I shared some thoughts on Business Today TV earlier in the day today. Discussed earnings of HUL, Asian Paints, Coforge and PVR. Tried to put some perspective on the royalty issue of HUL.
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