Investing in high growth, low profit businesses?

This blog post by @Nithin talks about things to keep in mind when investing in new-age businesses listing on Indian exchanges which are valued mostly on user growth and not financials (Revenue & Profitability). If you have any follow on queries or comments, do post below.

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@nithin greatly expressed !

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@nithin You have taken a good time to come up with such stats. This is what exactly we are talking about in all other sectors as well in this internet time, being in the education sector, I have seen a similar set of users with no value but traffic. Can’t agree more.

Actual Growth is supposed to happen to those who have simplified, sustainable and significant models like Zerodha. I wish there would certainly, next level of user dashboard customization is already planned. You surely understand the fact that different types of users using Zerodha, their strategies differs. Few enhancements can be taken up:

  1. Saving the previous day sorts & filters in the holdings & market watch section.
  2. Dashboard Customisation as per user preferences.
  3. Market Watch One Page View to quickly get the daily movement without adding/having the stocks in individual tabs of the market watch, both can also work, you may argue to have these options in separate sections/offerings.

Bringing the things under one umbrella of Zerodha would make investors life easier, that is what Zerodha name also signifies.

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@Nithin thanks for the insight . How does one figure out the bogus volume or fake users in a business . As traders and investors volume is a key point for us retail ppl.

Excellent article!

This is where it gets tricky for a retail investor and hence the need for an audit framework.

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Thanks , Hope Sebi is listening .

Coincidentally SEBI has put up a consultation paper proposing a bunch of changes and tightening some of the rules.

TL;DR

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Great Post! Any suggestions for additional reading materials? Are there any gurus/books which suggest a framework for investing in high growth businesses on the lines you have suggested or others.
Thanks,
Baby_Buffet

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@nithin nice article.
Can you also put an article post on new age influencers persuading everyone to have direct exposure on equities. And also on so called trading coaches and people launching couses and seminars.

Also zerodha being the beneficiary of these things, are you worried that this might not be in best interest of your customers specially since most of them are first time low ticket size clients.

Very nicely explained article. But till this bull market continues and interest rates remain low people will make a bee line for such fancy stocks ignoring the business model, cash flow or profitability. If bull markets make people rich bear markets gives them real lessons for life. But good old value investing will always remain core to any sensible investor.

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Very well put Nitin. Speculation has been at an all time high thanks to the pandemic and the majority of it is attributed to “fomo” and the greater fool concept. Like the great Peter Lynch said, “buy what you can explain in 10 minutes”. People need to focus on the underlying more than the expected percentage returns.

I guess what is more important than a framework for picking the best stocks, is figuring out how you will behave around money. In this context, I think this is a really good read.

In terms of how to go about selecting businesses in the new world, I haven’t really read books on this, but I do listen to a lot of podcasts and newsletters where VC’s & PE’s are interviewed or talk and write about. I also know a lot of these guys, so easier to understand their mental models when they are approaching investing in companies that are yet to generate revenue or profits. For example for most of them, once they are convinced of a market expansion story, the largest bet really is on the founding team. They spend a lot of time doing diligence on the founders.

A good place to start is https://a16z.com/

@Bhuvan maybe you can list a few.

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I don’t think it is fair to paint everyone in the same brush. Yes there are a lot of charlatans claiming to be making easy money and promising to teach you the secrets, but there are a few who are also doing a decent job in creating awareness the correct way. Whenever I have had an opportunity, I have said that stock markets are toughest place in the world to make easy money in the long run. If someone is claiming that it is easy, stay away from that person.

I don’t really know if I can write a full post on this topic though, as in nothing more to say other than the above 3 lines. :slight_smile: By the way, my gut says that there will be some regulations and restrictions that will put in place around this. There was already a circular from exchanges putting restrictions in place around brokers associating with influencers.

In this regard we invite your attention to Exchange circular NSE/COMP/43373 dated January 30, 2020,
wherein it has been stipulated that any content shared by any third party/entity (including a blogger/
person whether having his/her own channel or not) which provides information about Member’s
business, products/services/Brokerage plans etc or undertaking brand promotion or influencing the
investment/sale decisions of any investors, shall be treated as Advertisement and shall require prior
approval of the Exchange. It is hereby clarified that the said provision is also applicable to influencers
who promote (either as a standalone content or a part of their main content) the business,
products/services/brokerage plans etc. including undertaking brand promotion of the Members. The
decision of Exchange in determining if the influencer is a celebrity or not, and whether the
advertisement will be permitted, shall be final and conclusive.
Members are hereby advised to undertake adequate due diligence to ensure that the content used
by the influencer strictly adheres to the code of advertisement prescribed by the Exchange/SEBI from
time to time and prior approval of the Exchange is sought before its release. However, it is reiterated
that for contents that have been approved previously and that are to be used without any change or
updated with factual information, prior approval of the Exchange need not be sought again.
Members are advised to take note of the above and comply.

Thanks! Great to hear from you!! Scott Kupor’s book is indeed a good starting point. I will go and read it again. Wish me luck :grinning:

Counterintuitively, I still think you need to start with the classics. As for new businesses, I personally think some of the best writing on new growth business is being written on newsletters.

A few links:

https://www.joincolossus.com/episodes

https://twitter.com/ChrisBloomstran
https://twitter.com/substacklinda

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Before listing an IPO the financials of the past few quarters duly audited should be made public to empower Investors to make a more informed decision.

good and informative

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Thanks Bhuvan. I think you are right. For eg., diversification which was graham’s mantra probably can still be applied. Once all these IPOs hit, buy a clutch of them and hope one hatches. Nice user pic. Need to figure out how to get a good one :smiley:

Loved loved loved this article ^^ and it’s no bullshit approach!