Though I do not read business media of any sort, this popped up on my phone yesterday and I could not help but read –
Reading this, I was instantly reminded of what the legendary Seth Klarman wrote in his book Margin of Safety –
If interplanetary visitors landed on Earth and examined the workings of our financial markets and the behavior of financial market participants, they would no doubt question the intelligence of the planet’s inhabitants…the financial marketplace…is in many ways just a gigantic casino…
…hundreds of billions of dollars are invested in virtual or complete ignorance of underlying business fundamentals…Individual and institutional investors alike frequently demonstrate an inability to make long-term investment decisions based on business fundamentals…Investors are sometimes their own worst enemies. When prices are generally rising, for example, greed leads investors to speculate, to make substantial, high-risk bets based upon optimistic predictions, and to focus on return while ignoring risk.
Apart from fear, greed, and envy, hope is one of the biggest sins investors indulge in and one emotion that has wiped out more money than any market downturn ever could.
Even if all assets of Jet are sold in the liquidation process, it is certain that all the money will go to the 17,000 creditors and lenders who stand ahead of the equity investor as per the nature of the financial instrument. Worse, even the liquidation money won’t be enough to pay off these creditors entirely – Jet’s asset base was less than $2 billion at the end of FY19.
Under those circumstances, how can equity have any value as people speculating in Jet’s stock may be hoping for?
Though I am sure most of these speculators maybe those trying to average down their costs, or just playing the stock price game without any thought of liquidation.
Hope can be an extremely powerful force, and most people playing the market are generally a hopeful lot. But the nature of hope is that it believes what it wants to believe. It is endless in supply but has limited substance.
Richard Russell wrote in one of his Dow Theory letters –
Any time you find yourself hoping in this business, the odds are that you are on the wrong path — or that you did something stupid that should be corrected.
Of course, no investment – even in the best of businesses – is a sure thing. But the ones like in companies like Jet – and others laden with debt and poor cash flows – are plain lethal.
You will not board a disaster-prone aircraft just out of the hope of coming out alive by the end of your journey (which may, well, end mid-air).
Apply the same logic to investments in disaster-prone stocks, please.
Disclaimer: This post is for “informational and educational” purposes only and should not be construed as a recommendation to buy or sell the stock(s) mentioned. I do not recommend that you act upon any investment information without first doing independent research as to the suitability of such investment for your specific situation.
I love reading your articles. Just one clarification on Jet airways, why is stock moving up?? In one month from 30 rs to 75 rs. Any news???
Bharat Singh says
Please add search box like fs blog. Some times our want to read something related to some words or topics. But in mobile and desktop view I can not get it.
Arun Sreenivasan says
Nice read. Enjoyed it. It was after reading yours and Saurabh Mukherjea’s blogs, I started avoiding companies with ROCE below Cost of Capital. Dont think any airline company generates ROCE above CoC. Thanks for the insights. Have started reading more and understanding markets really well after following you all. Thanks a lot.