Friday, April 4, 2014

Perfect Financial Porn

Last week, we had a casual discussion on equity among friends. My role was limited to listening. Many of them were sharing their own experiences regarding stock purchase and sell.

Primarily, they were discussing on direct equity investment. Many of them were using bollinger graphs, rolling PE returns, market value, divident percentage, etc.. for stock picking.
 
While everything seemed to be going in a right direction and we were sure of learning something new, a friend interrupted the discussion with different view at stock picking. I used the word 'interrupted' because the advice given by him was purely a financial porn kind of thing.
 
At the outset, I thought he was making sense and we could use his advice. However, on little thinking, I understood how his advice was brilliant on paper but completely useless in practice. This is the exact meaning of financial porn. It will excite you but will not help you.
 
Here is the advice to get excited, think and then understand that you cannot use it:
 
Conversation: 
  • Friend (who gave this idea): Stock picking is very easy. You just have to understand the pricing. No need to research on PE or any other technical stuff.
  • All: how?
  • Friend: Simple. What is the price of say a Parker pen?
  • All: Normal parker pen would cost around 100 rupees.
  • Friend: Right. Now if someone offers you the same pen at 50, what would you do?
  • All: Grab them all and sell it at 100.
  • Friend: Correct. That is what we should all do in equity. To give you guys another example, what is the cost of regular marie biscuits?
  • All: Say 15 rupees.
  • Friend: Now, if someone offers you the same biscuits at 10, what would you do?
  • All: Exactly as previous answer. Buy them at 10 and sell at 15.

Now, on the face of it, looks simple and exciting. All could see themselves milking money.
 
On little thinking, we all saw what the real problem was. The real problem was, how could you apply?

In case or Marie or Parker pens, we have MRP written over it. This is the reason that we found Parker exciting at 50 because we know that the MRP is 100. However, it is not the case with equity. Shares do not come with MRP written on it.
 
Hence, you cannot understand if the current price of particular share is attractive or not, just by the face of it. You have to look for various factors like PE ratio or P/BV ratio to understand its pricing.
Example: I thought NTPC was attractive at 136 (PE<8). I bought it. Then came the news of CERC pricing and court asking NTPC to wait for its dues to get back. Now, the price of NTPC is 116. Suddenly, from swing trader, I have become long term investor for NTPC (I also got decent dividend from NTPC, but that is different story).
I gave NTPC example, just to show how markets move and we cannot estimate if a price is good or bad by just looking at it.
Before buying I should have researched about the date of court ruling and expected CERC ruling.
 
So the point of the post is, it is very difficult to separate noise from information. The advice which seems brilliant on the face of it can be completely useless. It will excite you but will not help you. That is financial porn.
 
Note: I have not commented on NTPC company. My comments were on market movement. Do not ask me why I hate or love NTPC or should I buy NTPC. These questions are better put to master like Subra.
 


2 comments:

  1. Dear Viren, congratulation for defining the Financial Porn correctly.

    Not many people are able to understand this common sense thing.

    Thanks

    Ashal

    ReplyDelete
    Replies
    1. Thank you Ashal...
      I did not have the courage to ask him where his investments were there.... However, looking at the advice and the confidence, I think his major chunk would be in SB account or in RE....

      Delete