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Again, some investors caught this soon. Some investors were late to understand. Some investors continued to not give it importance.
Likewise, for very new companies, even revenue was low. But the size of the potential customer base became a crucial metric to judge future success.
There's a deeper lesson in all of this.
The lesson isn't that you should understand which number is the most trendy one.
Numbers alone never tell the entire story of a company.
As an investor, which kind of a company do you want to invest in? A successful one.
How do you measure this?
That's the tricky part.
There is no single number or metric or ratio you can look at to judge an investment.
Individual numbers don't tell you enough.
One common example: the PE ratio.
Many investors are obsessed with the PE ratio of stocks.
What is the PE ratio? In simple words, it is the ratio of the price of a stock to the earnings of the company.
If the PE ratio is above a certain limit, they feel it is a bad investment. If it is below a certain limit, it is a good investment.
This 'limit' is different for different people.
But this singular obsession with the PE ratio of a stock harms investors more than it benefits.
There are many companies with low PE ratios.
And they are low simply because those companies are performing poorly – nobody wants to invest in them.
No matter how low and attractive their PE ratio looks, they're bad investments.
Likewise, there are many companies with high PE ratios. That doesn't mean they are bad investments.
Some very good stocks have had high PE ratios for years.
Another common behavior: some investors buy stocks based solely on their price!
If the price of the stock is below Rs 50 or Rs 10 or Rs x, they invest in it.
Again – wrong assumptions are being made here.
Yet another one: watching the 52-week trend of a stock. If a stock has been climbing for 52 weeks, they'll buy it.
Flawed logic. It's the same mistake being repeated.
Mutual fund investors obsess about the beta ratio, AUM, expense ratio – all of these mean nothing on their own.
There are many examples like this.
The point remains.
Investors should focus on the larger story – on what the number actually represents – not only on the numbers in isolation.
Likewise, for very new companies, even revenue was low. But the size of the potential customer base became a crucial metric to judge future success.
There's a deeper lesson in all of this.
The lesson isn't that you should understand which number is the most trendy one.
Numbers alone never tell the entire story of a company.
As an investor, which kind of a company do you want to invest in? A successful one.
How do you measure this?
That's the tricky part.
There is no single number or metric or ratio you can look at to judge an investment.
Individual numbers don't tell you enough.
One common example: the PE ratio.
Many investors are obsessed with the PE ratio of stocks.
What is the PE ratio? In simple words, it is the ratio of the price of a stock to the earnings of the company.
If the PE ratio is above a certain limit, they feel it is a bad investment. If it is below a certain limit, it is a good investment.
This 'limit' is different for different people.
But this singular obsession with the PE ratio of a stock harms investors more than it benefits.
There are many companies with low PE ratios.
And they are low simply because those companies are performing poorly – nobody wants to invest in them.
No matter how low and attractive their PE ratio looks, they're bad investments.
Likewise, there are many companies with high PE ratios. That doesn't mean they are bad investments.
Some very good stocks have had high PE ratios for years.
Another common behavior: some investors buy stocks based solely on their price!
If the price of the stock is below Rs 50 or Rs 10 or Rs x, they invest in it.
Again – wrong assumptions are being made here.
Yet another one: watching the 52-week trend of a stock. If a stock has been climbing for 52 weeks, they'll buy it.
Flawed logic. It's the same mistake being repeated.
Mutual fund investors obsess about the beta ratio, AUM, expense ratio – all of these mean nothing on their own.
There are many examples like this.
The point remains.
Investors should focus on the larger story – on what the number actually represents – not only on the numbers in isolation.
