THE NUMBERS GAME (PART 2)



Udit Garg

Published on 13/01/2017 12:00 AM

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In the previous blog we talked about information gathering. Information can be in any form and shape – quantitative and qualitative, pictures, anecdotes etc. Then why was the post titled “The Numbers Game”? The reason is that in markets, it eventually boils down to numbers. The markets are a haven for number lovers, there are so many numbers that entire streets, buildings, communities and now even district(d!) are now dedicated to house them.

The first step post collecting the information is to see which pieces are material, i.e. have a bearing on the share price. Once the information is segregated, the most important ones are typically 1) the forward looking ones, i.e. which give us insights about the future and 2) the ones not yet factored into the market pricing. If you believe in the Efficient Market Hypothesis you would only rely on #2 to make investment decisions. Personally speaking, I believe that markets are 95% efficient (I don’t have data to back this claim though), allowing value hunters/stock pickers with enough scope to find value should they try hard enough.

Getting back to the issue at hand; it is essential that you translate your thesis into hard numbers to be able to estimate the value of the stock. This translation could be at several levels, a few being

  1. Future financial performance in form of revenues, margins, capex, interest rates etc. ;
  2. More granular level of business drivers such as volume traction, pricing information for a product, costs of some raw material, penalties etc.;
  3. Expectation of capital flows, currency rates, cost of capital etc. ;
  4. Valuation expectations ;
  5. Market expectations for financial performance

I do admit that all of this is a bit too fuzzy at times, and it becomes difficult to put exact numbers to the information. Secondly even if we know something on a standalone basis it wouldn’t mean much. Thirdly, how do I analyse and make use of that information – for example if dealer’s sales are 10% higher this year, or interest rates dropped by 1% for a company. How do I value that information?

The fuzz talked above is the ART of investing, but the rest is the SCIENCE and that is where DistrictD comes in. We at DistrictD are taking-on the Science of investing, the ART we believe comes only with experience. DistrictD is a platform that provides you all the tools that you need to process the information you get on an almost daily basis about what is happening in the business world. For example, tomorrow say you wake up and read in your business newspaper that Britannia’s products are selling like hot cakes (though they sell cold ones!), there is a place you can go to and see how that would translate into the value of the company’s stock. You can go the same place to see what the market is already factoring in as sales for it. What is it being valued at by experts? Is there a cheaper company in the same product category, who could also benefit?

These and a whole host of questions are being tackled by us. To start with, we can do that because of our detailed granular handmade financial models for every listed company – which will allow every user to track the entire stock universe. These models are dynamic i.e. a user can input his own assumptions and estimate the worth of the information they hold. The models are flexible, allowing user to play with them in various ways, see sensitivities, estimate risk etc. The models can be shared with a set of friends or with the whole world for their inputs or validation.

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