Think Big

by puneinvestor

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1 crore = 10 million

The average “retail” investor finds it difficult to grasp what he is buying when he invests directly in the stock market. On more than a few occasions I have heard people talk of a four digit stock price as being too expensive and a one digit price referred to as “so cheap”. Nobody talks about buying shares in a 10,000-crore company or 500-crore company.

Being middle-class, our lives are lived modestly. We have salaries in the thousands per month, we buy cars for which we pay equated monthly instalments (EMIs) of thousands per month and even our biggest purchase, a house, is paid for in EMIs of tens of thousands per month.

When we read about big numbers in relation to companies or the economy, our eyes glaze over. Banks have bad loans of twenty-four lakh crores? That must be a typographical error. It’s probably lakhs, or crores. Our minds are not able to process such large figures.

If you are discussing Tata Motors at a social gathering and say, “I don’t think the 300-crore standalone loss last quarter is really that significant to their overall operations”, your friends may think you’re trying to show off by throwing such big numbers around. Instead, if you mention, qualitatively, that the commercial vehicle market is doing poorly, that will be seen as a more sober comment. The middle-class mind is like this only — we don’t allow ourselves to be so immodest as to bandy about really big numbers in a serious discussion.

This mindset is a major barrier to investing intelligently in the stock market. Like it or not, the stock market is nothing but a place to buy and sell shares in companies, and these companies are worth thousands of crores. To be able to understand a listed company, we need to first shed our inhibitions about big numbers and pretend we are business tycoons who might want to value and buy the whole company. If we are able to do that, we will be well on our way to being good investors. We then need to assess the numbers in the income statement and balance sheet in relation to the whole company. So a CEO salary of 2 crores could be okay, a fixed asset investment of 100 crores could be small and a loan outstanding of 1,000 crores might be negligible. After the valuation is done, all that’s left is to divide our assessment of the value by the number of outstanding shares and compare the result with the stock price.

The stock price is the last and smallest number in our ideal journey to an investment decision. Too many of us make it the first and primary number, perhaps because it is easily digestible. Instead, think big.

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Image © XPI3 Beqy