When I was looking to acquire the first client for my writing business in 2011, I had no idea how much to charge. I had no point of reference as far as content writing fee was concerned. For me, there were a few hours of work involved.
Anyways, to my first prospective client, I dared to ask for a hefty sum of Rs 2,500 per article, simply going by the understanding that you charge not for how much work it is for you, but how much the service is worth for the client.
It took me several clients to figure this out. My next client, I tried charging Rs 3,000 per article. He went for it. The next client Rs 3,500. The next client Rs 4,000. I kept charging more and more until finally three clients all turned down my Rs 5,000 fee. So I lowered the price back to Rs 4,000.
Essentially, at Rs 5,000, my prospective clients were telling me, “Your services are overpriced, and not worth it!”
That left me with a very valuable lesson in how to run a business. You cannot keep raising your prices indefinitely. How much ever you want to believe that a company has pricing power, it cannot raise its prices indefinitely because there would come a point where its customers would say, “It’s overpriced, and thus not worth it!” And then, there would emerge competitors who would be willing to offer similar products/services at lower prices.
It’s Not Worth It!
We create boundaries for what something is worth.
A glass of mango juice on the streets of Mumbai costs Rs 100, and it’s considered reasonably priced. The same juice in Agra would be seen as expensive at Rs 50. And the same juice in New York would be seen as bargain at Rs 300.
Clearly, we’re neither discussing the ability to pay nor are we considering the absolute value of a glass of juice.
No, it’s about our expectation of what people like us pay for something like that.
Consider stocks. Apple Inc., currently trading at around 15x P/E on the Nasdaq may not be a stock picker’s delight in the US. But a similar quality business at 15x trading in India would be gobbled up, simply because the stock is not overpriced relative to the broader markets and what similar other stocks are trading at (the relative valuation concept). And then, 15x is what people like us would be very happy to pay for a business like Apple.
When you say a stock is ‘overpriced’, you’re actually saying, “It’s not worth it!”
Lots of things aren’t worth it, at least to you. Like, maybe, a watch priced at Rs 1 lac, a family holiday that costs Rs 2 lac, a car that costs Rs 10 lac, or maybe a subscription to my Value Investing Almanack, priced at Rs 9,999. 😉
In the same way, lots of stocks aren’t worth it, at least to you, right now –
- Stocks that are already up – to say 40-50x P/E – appear to be overpriced.
- Stocks that are always going up always appear to be overpriced.
- Stocks you missed at 10-15x P/E, and which are now at 20-25x appear to be overpriced.
Consider these overpriced stocks (at least that’s what the P/E suggests), most of which are amongst the well-managed businesses in India –
Data Source: Screener.in
From this list, I’ve been looking to buy stocks like Asian Paints, Page, Eicher, and Marico for years now. But they always look overpriced!
The harsh, but honest, truth about investing is that good businesses almost always seem overpriced when you want to buy them. Or maybe, you want to buy good businesses only after they have risen to become overpriced.
You did not buy, say, Pidilite when it was selling for a tenth of its current price, and when not many people like you were willing to buy it. Of course, if everyone saw what was about to happen to Pidilite’s stock, it wouldn’t have been for sale at the price being offered.
And you could have bought the stock of, say, Ashiana Housing, for just Rs 30 in June 2011 (Rs 225 currently). But back then, no one thought the company had a chance…which is precisely why the stock was so cheap (not only in terms of P, but also P/E).
The Big Challenge
As an investor, you don’t only spend cash on your investments. You also spend your effort, focus, and your commitment, which come before you spend cash on them. And the good investments always seem like they take too much of your effort, focus, commitment, and money…until later, when you realize what a bargain that effort would have been (hindsight bias).
So, the real challenge today for you and me isn’t in finding an overlooked obvious bargain that people didn’t notice. First, such bargains rarely exist in reality (mostly in hindsight). And if they do, they’re not as obvious as you may expect them to be (again in hindsight).
The real challenge for you and me is in learning to tell the difference between the stocks that feel overpriced and the ones that actually are.
The insight is that when dealing with stock valuations and future, there’s no right answer, no obvious choice.
Every good thing looks overpriced. Until it’s not.