Investing

Buy good businesses, avoid weak companies

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A lot of investors are on the lookout for turnaround stories in the stock market.

Stocks that have been beaten down are invested into, as investors anticipate the company to turnaround and show improved earnings in the future.

But the major issue is – 9 out of 10 companies that are expected to turnaround, don’t actually turnaround.

Small investors have been holding on to companies like Unitech, Reliance Power, Suzlon etc for over a decade – hoping that these companies can turnaround. But both the company and the stock have been eternally struggling.

Currently, ‘Yes Bank’ is one such company that almost every retail investor is buying. The fascination among inexperienced investors with ‘Yes Bank’ is bewildering.

At 45 rupees per share, the stock appears cheap, but the company is loss-making!

Three quarters ago, Yes Bank posted net loss of ₹ 1508 crore. In the last quarter, the company suffered losses in excess of ₹ 600 crore.

Why would anyone want to invest in a company that is posting such heavy losses?

It could be a good short term trade for experienced traders, but why would an ‘investor’ with a long-term perspective buy Yes Bank when quality banks like HDFC and Kotak are posting excellent results, managing their NPA’s well during tough economic conditions and also growing steadily every quarter.

Ask yourself this: If you were the owner of two restaurants – one is doing good business and the other is loss making – Which business would you invest more money into? Which business would you shut down or sell – the profitable one or the loss making one?

If the answer is obvious, then your approach towards stock market investing should also be the same. In the long run, good businesses will continue to grow and create wealth for its shareholders.

The weak ones might give you short term returns, but eventually they will lag way behind.

If you look at your portfolio 5-10 years from now, there are chances that ‘Yes Bank’ might not even be doing business – but the probability of HDFC or Kotak gaining market share and continuing to be leaders in the banking sector is very high.

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1 Comment

  • Yes I recently bought yes bank based on the remarks by the cmd of state bank that the bank is too big to fail and the system will not allow it. There are also statements made that foreign entities are willing to invest huge amounts for a stake in the Co. I thought I will invest a small amount and see. And as for turnaround stories there is the instance of Satyam which was bought by tech MAHINDRA and see where it is now.

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