How investors could have avoided losses in paytm and zomato

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“Learn to use the knowledge of the past and you will look like a genius, even when you are really just a clever borrower.” 

Robert Greene is a famous author, best known for his books on strategy, power, and seduction.

Now, the reason I liked the above quote it because it can save you from big losses in the stock market.  

Let me explain how.  

Will you invest in a company that has made a cumulative loss of almost 2,000 crores over the last five years, with not a single profit-making year? 

Hmmm…may be depends on the valuations you might say.

Well, what if the stock is available at a price to sales multiple of a whopping 40x?  

A loss-making stock with an absurd valuation? You’d reject it outright, wouldn’t you? 

Let’s take another example.  

This is another loss-making stock, racking up cumulative losses of more than 4 thousand crores and once again, not a single profitable year in the last four years.  

The valuations? Yet again, a whopping price to sales ratio in the region of 30x.  

Now, what if I tell you only a few months back, investors were falling head over heels in order to make an investment in these stocks.

Sounds unbelievable, doesn’t it? 

However, it is true. These financials are of none other than Paytm and Zomato.

The stocks that have destroyed enormous wealth for shareholders over the past few weeks with no respite in sight.

Shares of Paytm are down in the dumps. Since the start of this year, they have plunged around 60%, from 1,335 to 546.

Meanwhile, shares of Zomato are down 41% so far in 2022.

The reason investors fell for these stocks is because they forgot the important lesson I have highlighted at the top of this post.  

All they had to do to look like a genius is learn to use the knowledge of the past. These companies had a woeful past and a cursory look at the financials would have sufficed to know this.  

Yes, there will be some companies where the knowledge of the past may not work, but it will be more an exception rather than the rule.  

And you can’t construct a portfolio using exceptions.  

So, make it a rule that you will not invest in companies that have a big loss-making history even if it is being offered at attractive valuations and promises a very bright future.  

It will save you from a lot of trouble in the stock market.  

Almost always use the knowledge of the past. Trust me, you’ll look like a genius even when you are really just doing the most obvious thing an investor needs to do.  

By the way, Co-head of Research at Equitymaster Rahul Shah shared this update on his Telegram channel last week.

Be a part of Rahul’s journey as he shares ideas that can potentially accelerate your profits. Join Rahul’s Telegram Channel – Accelerated Profits.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

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This article is syndicated from Equitymaster.com

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