PE is not the only factor but an important factor.
Ultimately the growth has to justify how much PE are you paying for the company.
There cannot be an unlimited PE multiple based on some xyz parameters.
One of the best debates I have seen in recent history between @SunilBSinghania and Saurabh Mukherjea.
TOPIC: Has P/E lost its relevance?
I resonate more with Sunil’s side. Here’s a thread 🧵 on the main points made by him:
@varinder_bansal @safiranand @myvaluepicks
PE is not the only factor but an important factor.
Ultimately the growth has to justify how much PE are you paying for the company.
There cannot be an unlimited PE multiple based on some xyz parameters.
In hindsight we can say that from 2001 to 2021, a company grew at 25 % and we should have given a very high PE to it.
But on the day when you buy, you don’t know that the company is going to grow at 25% for the next 20 years.
Things have become more competitive.
New generation don’t really care much about legacy.
Convenience and affordability matters more.
The longevity and sustainability of growth has changed dramatically.
Company 1: Mkt Cap of 50 cr
Company 2: Mkt cap of 1 lakh cr
50c r company can become 3x, 1 lakh cr company cannot become 2x.
On absolute basis you end up making 5 cr vs 5k cr in 1lakh cr company.
Companies like Colgate, HUL, Pidilite are bigger in size today. In many product categories, penetration & disruption caused by technology is higher.
Even if they have grown 25% for past how can you assume they will continue to grow at 25% in future.
If a company is growing at 10% and you pay 70 PE multiple - If your return expectation from the company is 10%, it has to trade at 70 PE infinitely.
This has not happened any where in the world.
There are only 5 companies in US that have traded at more that 50PE for more than 5 years.
Even Google, Apple and Microsoft are trading at 30-40 times earnings.
And people there think they are in a bubble.
Apple is a 30 PE stock, growing at 35%, has better ROE, and better Free Cash Flows than Indian quality and MNC companies.
In India, these so called quality companies are trading at the highest level anywhere else in the world.
Unless I am confident of the management I will not invest.
But who are we to give a certificate that this management is the best and this management is bad.
Its a fallacy to say larger companies have good management and smaller have bad.
6 months profit of Tata Steels > Years of profit of Asian Paints
HDFC has underperformed ICICI big time.
There is always a phase when you can say that it is priced beyond perfection.
When Interest rates were going down, there was a justification that PE should go up.
Now that the interest rates have started to go up, then based on that justification the PE should go down.
Quality at any price doesn’t work.
It has never worked in the last 300 years of history in the US or anywhere else in the world.
It is not going to work in India because India is not unique.
Any company that is only value, does not give you returns.
We look at companies where profit growth can be 2x in next 5 years.
Unless there is profit growth you will not make consistent returns.
We are not looking at 90% ROE company trading at 80PE.
We are okay with 25% ROE company growing at 15%, with 15PE. There is more money to be made here.
You have to start looking at companies young. Only way to play compounding for long term.
Everyone knows what Mr. Warren Buffett does.
No one has been able to mimic him because investing is more that formulas and numbers.
You need to have the feel of what to do when & stay with your conviction when you are not doing well.
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1/“What would need to be true for you to….X”
Why is this the most powerful question you can ask when attempting to reach an agreement with another human being or organization?
A thread, co-written by @deanmbrody:
2/ First, “X” could be lots of things. Examples: What would need to be true for you to
- “Feel it's in our best interest for me to be CMO"
- “Feel that we’re in a good place as a company”
- “Feel that we’re on the same page”
- “Feel that we both got what we wanted from this deal
3/ Normally, we aren’t that direct. Example from startup/VC land:
Founders leave VC meetings thinking that every VC will invest, but they rarely do.
Worse over, the founders don’t know what they need to do in order to be fundable.
4/ So why should you ask the magic Q?
To get clarity.
You want to know where you stand, and what it takes to get what you want in a way that also gets them what they want.
It also holds them (mentally) accountable once the thing they need becomes true.
5/ Staying in the context of soliciting investors, the question is “what would need to be true for you to want to invest (or partner with us on this journey, etc)?”
Multiple responses to this question are likely to deliver a positive result.
Why is this the most powerful question you can ask when attempting to reach an agreement with another human being or organization?
A thread, co-written by @deanmbrody:
Next level tactic when closing a sale, candidate, or investment:
— Erik Torenberg (@eriktorenberg) February 27, 2018
Ask: \u201cWhat needs to be true for you to be all in?\u201d
You'll usually get an explicit answer that you might not get otherwise. It also holds them accountable once the thing they need becomes true.
2/ First, “X” could be lots of things. Examples: What would need to be true for you to
- “Feel it's in our best interest for me to be CMO"
- “Feel that we’re in a good place as a company”
- “Feel that we’re on the same page”
- “Feel that we both got what we wanted from this deal
3/ Normally, we aren’t that direct. Example from startup/VC land:
Founders leave VC meetings thinking that every VC will invest, but they rarely do.
Worse over, the founders don’t know what they need to do in order to be fundable.
4/ So why should you ask the magic Q?
To get clarity.
You want to know where you stand, and what it takes to get what you want in a way that also gets them what they want.
It also holds them (mentally) accountable once the thing they need becomes true.
5/ Staying in the context of soliciting investors, the question is “what would need to be true for you to want to invest (or partner with us on this journey, etc)?”
Multiple responses to this question are likely to deliver a positive result.
