Hopevesting

Hopevesting:

Hope plays an important role in the process of investing. The type of hope and degree of hope differs from an opportunity to another. There are mainly two types of hopes:

1. The business will be able to maintain the status quo in times to come
2. Things will turnaround for good in a business that is going through pain

In bucket 1 above, it is always difficult to find opportunities at reasonable rates. Take the example of Hindustan Unilever or Nestle. These companies are doing extremely well and naturally enjoying hefty valuations. Or for that matter take a Facebook or Google. When you invest in any of these companies, you are hopeful of the good show to continue. But, wait a minute! A similar hope and upbeat enthusiasm were there in the past for companies like Nokia, Blackberry, etc. What happened here? Well, times changed, and so did business models. Not necessarily all companies go down with time. There are few stories of great consumer brands like Coca Cola standing the test of time for decades, and yet going strong.

What am I alluding to? Well, there is a risk of investing in companies that are doing extremely well at the moment. And that risk is- high valuations. Unfortunately identifying great businesses in the early stage is a challenging job.

About bucket 2, these are companies that may be struggling at the moment, but the pain looks temporary. There are enough sectors that are going through pain in India. Real estate, banking, infrastructure, automobiles, and many more. Only time will tell whether the pain will be permanent or temporary. A good characteristic of bucket 2 is that valuations are rather reasonable. But again, scouting for low valuations ends up being a trap, more often than not. Many of these companies may take a long time to get back their mojo. Remember, as an investor, you are likely to lose patience with these opportunities. You need to choose your bets carefully.

This brings us to the summary of different investing risks:

1. Valuation Risk
2. Business Risk

As a rule of thumb, it is highly likely that you WILL have to assume one of the two risks above. Very rarely do we get opportunities where both the risks are low. It is up to the investor to reflect upon the kind of risks she wants to assume. Some people are comfortable with Valuation Risks and others with Business Risk.

When you decide to accept Business Risk, you are Hopeful that the situation will turnaround. When you decide to accept valuation risk, you are Hopeful that the status quo in business will be maintained. Don't forget, in both cases, you are a Hopevestor!

Choose your risks well, and hope for the best. Cheers, Hopevestor!