Friday, October 24, 2014

Diwali lessons on money

Over the years I have tried to learn as much about capital markets as possible. It's a fascinating industry that lubricates the wheels of industry and economy. Without the modern capital markets quite a few of our beloved innovations would have been challenged. I maintain that our capital markets, as they are, are necessary (but maybe a little lopsided with respect to rewards to those employed - that's for another post)

Lesson one (or maybe Lesson Zero) - Asset Vs. Liability

Every investor has to first learn the hard factual difference between an asset and a liability. I have very painfully over the years understood this and got to a stage where the incremental liabilities have been reduced. Well, I never had loans or credit card debts but I was engaged in activities that cost me money instead of creating wealth. One such is the bike I own - a Royal Enfield Thunderbird 500. No doubt its a great machine and lots of fun to drive, but its maintenance is akin to owning an elephant as a pet - impressive when you ride, but otherwise keeps draining your resources. The last time I had a flat tyre, my laziness took over and I got it repaired only after 3 weeks - 3 weeks of no expenses. Otherwise every other month, the bike goes to the service center and costs me money in repairs - small trickle but endless nevertheless. As with all liabilities, it brings no tangible value to me. And the intangible joy element - I should have stuck to my old Pulsar, since I am more of a traveler than a motorcyle enthusiast - so long as the two wheels move my soul, I am at bliss.

Lesson two - See things for what they really are. 

Investing is not rocket science. If you have common sense, you can become a very good investor yourself. As your investments grow, your knowledge grows and you become even better. But for this to happen, one must first accept and overcome one's blind spots. As a layman, one must begin to see everything in front of them for what it truly represents. Coming back to my acquisition, the TB 500, I massively failed to realize of what it truly portends. I understand bikes. I understand the passion that a "Bullet"/ "Royal Enfield" invokes in millions in India. I have been meaning to own one since ages. Back in 2012 when I test drove the new Thunderbird 500, I fell in love with the modern machine - the ease of handling, the power of the engine, the stability of the ride. This was beginning of a new era for Eicher Motors. With that one machine they unlocked the potential of the brand. As an enthusiast myself, I instinctively understood the thousands of dreams it was going to fulfill. What I completely missed is what it would do to the balance sheet and profit & loss number of the company. As Peter Lynch says in his book "One Up On Wall Street", I need not be brilliant to launch my portfolio into an orbit. I simply need to keep my mind open. With the launch of the modern bike, the only way for the revenue numbers of the Eicher Motor Company to go was up.

The magnitude of the mistake

So the mistake I committed - The stock price of Eicher Motors rose from Rs. 2258 (Oct 1, 2012 when TB 500 was launched) to Rs. 11890 (today) - that's 5.26 times. Rs. 35,000 invested in the company stock at that time would have allowed me to buy the motorcycle today without any additional expense, a mere two years later. And if I had been wise enough to have actually invested the whole amount I spent in actually buying the bike at Rs. 178,000, I today would have had a cool Rs. 936,000 and could have bought the new 'Cafe Racer' with money to spare. Instead all I have now is a liability that sucks money out of my poor incomes.

There are several mistakes I have made with money, but this one rankles quite a lot. Happy Deepavali folks!