Magic of Investing - By Duby Rex

Abracadabra - a word whose origin is vague even for google, but is well known for magic enthusiasts. As the word is uttered by the performer, the trick captivates the attention of the audience. It is well known that such words as well as the attractively dressed good looking assistants are used for diverting the attention of the audience, when the magician is getting ready with the trick.

Smokes & Mirrors

"Misdirection is the cornerstone of nearly all successful magic" - T.A. Waters in the Encyclopaedia of Magic and Magicians



Not only in entertainment but even in warfare, misdirection seems to play a vital role.

"All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near." - Sun Tzu, The Art of War.

The Invisible Gorilla

In 1999 Daniel Simons and Christopher Chabris conducted an experiment wherein audiences had to observe a short video of 6 students playing basketball. The stated objective was to count the number of passes made by the players dressed in white. Such a simple experiment, what could be earth shattering right? During the video, a person dressed as a gorilla walks into the centre, thumps its chest, stays in the video for 9 seconds and then walks away. We would have assumed that such an intrusion would have captured the attention of the audience in totality. But behold, 50% of the viewers missed the gorilla because they were too focussed on counting the number of passes.



When something works so well in magic and warfare, how can it not affect the stock market? Misdirection or non focus coupled with herd mentality could be a handsomely rewarding theme.

Ok here are some examples in hind sight. These are given here to highlight the theme, to provoke the thought process and NOT as investment ideas.

Bite the bullet

Circa 1994, a group manufacturing trucks acquired a motorcycle company along with its brand. Now it has become investing folklore to talk about Eicher and Royal Enfield Bullet.



As much as it would take a lucky genius or blatant liar to catch this 1000X, even some years ago every Ram, Robert or Rahim would have had a friend who would have booked a bullet and was waiting nearly 6 months for its delivery. Even if we had thought about why people are literally waiting in queue for this bike we could have had a decent run in the stock. But the theme here is not about missed multi baggers, it is about how a small motorcycle business added a lot of value to the core truck business. It was not noticed for long and when it was, the herd mentality fuelled the rocket. The stock market was keenly focusing on the truck business and missed the bullet.

Few years ago, the erstwhile Crompton Greaves (now CG Power) was struggling due to the debt it had taken to pay for the various acquisitions it had made in the power segment. At the same its electric consumables business was performing decently on an auto pilot mode, after all it was No 1 Fan brand in India and had high ranking in the lights / pumps space. The consumable business was having negative working cycle and very high return ratios. What was remarkable was that the management was fire fighting for the core business when the electric consumable business was rolling along. To cut a long story short, the jewel crown was sold to PE players, demerged and is now listed as Crompton Greaves Consumer Electrical Limited.

A similar story played out in a paper business. The company was making losses in its core paper business but the electric business was again doing well. The story has not yet played out fully but as of now the electric business has been demerged and is going to be listed.

The above illustrations are to highlight that when the focus is on one part of the business, another one could be silently performing and when it gets noticed there could be re-rating.

We need to realize that this is just a theme and not the core concept. The core would depend on how dependable the promoters are, how comfortable we are assigning a fair value to the business in totality, at what price we acquire the stock, the path the business would travel for the next few years etc., Without the core, the theme may burn the fingers. Yours truly realized that being human is a charity in the stock market also. Replacing a single alphabet could make IDFC into HDFC but the shareholders may have a slightly different view.

Even now there are many plays in similar themes. But the magic will be created only when the theme and core fits to a T.

Disclosures: The companies and stock mentioned are for learning purpose. Not by any imagination should they be construed as buy or sell call.

Ref: http://www.theinvisiblegorilla.com/gorilla_experiment.html

The author of this article is - Duby Rex

Twitter - @DubyRex

Source : Equity Bulls

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