Saturday, October 19, 2013

Lottery Tickets = Small Caps

Lottery tickets are easily available, cheap and offer a great potential ROI. And yet, no rational investor would think of them as a great investment.

Why then, does the hunt for the potential multi-bagger small cap seem to catch our investment fancy? No one seems to be immune from them - see Cravatex for a classic example.

These lotteries are enticing because they create a false impression of value for money and obscure the obscenely low probabilities. Anecdotal stories of people winning the lottery captures our imagination, and drives the pursuit of the next great small-cap multi bagger.

Investment Idea: Sintex - Will it Tank?

In September 2013 (a month ago) Sintex was selling at a market value less than 2 times its annual earnings. If we were to assume that their business would remain stagnant and would continue to deliver their current earnings in perpetuity, that would be akin to a FD that returned 50%.

Here is an 80 year old company, an established brand with a global footprint, and yet it is being valued for bankruptcy.

Such are the ways of the nutty Mr. Market. For the rational value investor, the question here is not whether to buy, but how much to buy.

Sometimes, we are so busy looking for the Buffet, that we miss the Graham