April 15, 2009

Degree of difficulty does not count

I wrote about the nano launch and its impact on maruti suzuki recently. Interestingly, there were several comments on Tata motors and a few personal emails asking me about what I thought about the company.

I have cursorily looked at the company in the past and avoided it as it was too complex for me.

A few questions on my mind

- How will the nano do ? Will it be success or a millstone for the company ?
- How will Tata motors manage the JLR accquistion ? how successful will the integration be ?
- How will Tata motors manage its debt ? Will I face an equity dilution in the future ?
- How will the HCV/MCV and other products perform for the company ?

There may be more questions, but I can think of the above questions as of now. Now some of you may have answers for all of them, but for me these are diffcult questions and add to quite a bit of complexity to this investment idea.

In enginering exams (or any other exams), the tougher questions have more marks assigned to them. So if you want to do well, you have study and crack (or copy :) ) these questions. Fortunately, investing is not like engineering exams. I will not make more money if I solve a diffcult problem. If I can find a simple to understand company, which is undervalued, with a few or maybe a single tough question to answer, I will make good money through that idea too.

A Buffett Quote
I am highly influenced on this point by the following quote by warren buffett

Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.

Whats my point ?
Why bother with a complex and diffcult to analyse company when there are simpler, easy ideas out there ?

Ofcourse, easy and diffcult is very subjective. A few of you may have an indepth understanding of Tata motors and may find it to be an easy problem to crack. In that case, you have an edge over the market and could make well-deserved gains on the stock.

Other topics
I was recently forwarded a link to this site - magicformulaindia.com by Jaishankar Panchapakesan . It is a good resource for investors. I have done the magic formulae calculation in the past manually using spreasheets and found it time consuming. So if he maintains the site on a regular basis, it should be a good tool

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3 comments:

income.portfolio said...

Rohit,

Very true. Why bother with something very complex, when there are other opportunities.

TIP

hiten said...

Hi Rohit,

I read your blog regularly and I generally like your thoughts on a subject.

But for this particular post, I beg to defer with the heading of the post "Degree of difficulty does not count", I believe it does count.

Many people will be solving a simple problem (and hence the there would be less mismatch in valuation to intrinsic worth), but very less will be interested (or rather successful) in solving a complex problem (leading to high mismatch in valuation, and higher returns).

An example I can think of is the value of Reliance Industries before the Ambani split and after Ambani split.

But I do agree with the core idea of your post i.e. if there are many simple problems to solve and earn decent returns, then why bother with complex problems.

Cheers,
Stock Enthusiast

http://india-votes.blogspot.com/index.html

Rohit Chauhan said...

Hi hiten
there is definitely more money in solving difficult problems sometimes. however my point is this ..in a bear market when there are simple ideas around and one plans to buy a limited no. of stocks for the portfolio why worry with difficult problem.
as i said, there is subjectivity in it. a difficult problem for everyone could be a simple one for you due to ones background training etc. in that case there are good returns to be made

regards
rohit