When share prices are volatile, you may want to focus your attention on businesses that generate profits. You know the usual suspects if you are already investing in the stock market. These companies sell goods and services that people buy despite inflation or salary cuts. But such ‘defensive’ companies tend to get expensive as everyone rallies around them.
If you are new to investing, you may want to focus on learning instead of getting adventurous. There are plenty of opportunities in the market if you invest your time reading a bit more than you usually do in finance.
Legendary American investor Warren Buffett once famously said that you discover who’s been swimming naked only when the tide goes out. The quote refers to the speculation that develops when stock markets rally and when it goes out when prices fall.
There are two types of investors. Long-term investors tend to buy and hold shares for a considerable time. The short-term traders buy and sell quickly to make trading profits. The market comprises people with diverse views on the same company. You need all of them to be active to have a thriving stock market system. When stock markets correct or go into a bear phase (fall more than 20% from their recent peaks), investors turn cautious. They cut their exposure to equity assets. The long-term investors stay put, but the short-term investors cut their losses by reducing their exposure. There are more sellers in the market than buyers.
Stock market investing is more about your guts than analysing data and profit trends. A primary reason is that today’s share prices reflect tomorrow’s profits. You have to identify winners and losers based on their ability to ride through tough times. To arrive at that decision, you need to know about the financial performance of such businesses. That is an essential requirement. The other ‘X’ factor is your ability to believe in the future profit growth of these businesses.
A simple way to look at it could be tracking the performance of a company like One97 Communications, which runs Paytm. It trades at less than a third of the value of the peak it touched last year after listing in November 2021. In the offer document released during the IPO, the company wrote that it was unclear when it would generate profits. The company’s stock market performance reflects the market perception of the value of the business without the euphoria around the brand. As share prices fell, share prices of companies like that one have been hit harder. Stock market investors do not like uncertainty. Over the past couple of quarters, the company made noises that set a target to turn profitable.
According to the latest transcript, the company is betting on ‘lending’ to become a more significant percentage of the revenue (and profits). It is also planning to cut down on operating expenses to improve profitability.
After announcing quarterly financial results, company managements speak to analysts on a conference call. The transcript of such a call is published on every company’s website. If you wish to read a bit more on companies you think matter; you may want to go through these transcripts.
Paytm shares have lost more than half of their value in 2022. However, they have been doing better than the broader market for a month since the conference call. Some investors see a value in the company and believe it may turn in operating profits by September 2023.
As an investor, you may want to decide whether to treat Paytm as a payment business or a lending business. The euphoria around Paytm is always about small payments we make using the service. However, the company suggests that merely being a payments company is not enough. It needs to lend more money to users too to make more money.
So, can Paytm become ‘the’ lender to ordinary people using a smartphone is the question you need to ask. That is where your gut comes into play.
Two type of investors in markets
When stock markets correct or go into a bear phase (fall more than 20% from their recent peaks), investors turn cautious and cut exposure to equity assets. The long-term investors stay put, but the short-term investors cut their losses by reducing their exposure.
Winners ride through tough times
Stock market investing is more about your guts than analysing data and profit trends. A primary reason is that today’s share prices reflect tomorrow’s profits. You have to identify winners and losers based on their ability to ride through tough times.
2022 Saw Paytm shares lose over half their value
(The author is the editor-in-chief at www.moneyminute.in)