Always invest for future but don't forget the past

Investing is always done keeping future in mind. When today I invest in any business I am mostly interested in what the cash flows would be in future. Based on these estimated cash flows I come up with my intrinsic value of the business and then based on what market is offering me I decide on my buying decision. The business may have done great in past, however if I somehow feel that the past performance can no longer be replicated I won't buy into that business no mater how attractive its current price is relative to its past earnings.
As Mr. Warren E. Buffet rightly puts: If past history was all there was to the game, the richest people would be librarians.

P/E or price to earnings ratio is one of the commonly used yardstick to evaluate any business. The question here is what P/E we should use trailing or forward. Most rookie investor blindly follow trailing P/E. This is very easy to calculate and can be calculated fairly accurately. Business may (deceptively) look very attractive on this parameter, however when there is no visible earning potential in future, soon it turns out to be very expensive. What mostly happens is that earnings fall sharply and then even with little or no fall in price the P/E ratio becomes very high and same business which looked cheap a year back now looks very expensive and all we are left with is holding a dud business.

So should we use forward P/E? Math isn't simpler here too! Forward P/Es are not easy to estimate and each analyst comes up with his own estimates of same business. Whats even more dangerous is that every month depending upon cheer or gloom in the market, they continue to revise their own estimates of P/E. Investor ends up even more confused with all these flip/flops.

Evaluating individual business based on P/E does no good. One should not pay too much attention to this parameter at the time of buying a business. What one can do is look at the business you 'really' understand and use your own experience and judgment to estimate future cash flows of the business. Discount them at an appropriate discounting rate to come up with intrinsic value of that business. This exercise has to be done in complete isolation from market. Don't do such a thing like if market price is 100 and then you say that my acceptable entry price would be 80, this way you are nothing but a slave of market moods and all you would end up is speculating and not investing per say. If your honest valuation comes to 50 even if current market price is 100, stick to that and one day you would find that same business quoting below your valued price. Buying a business quoting a discount of your estimated intrinsic value and not at a discount of current market price is a better way of making expected returns from the market.

What I have so far mentioned has lot of subjectivity attached to it like 'business you really understand', 'honest estimation of cash flows', but again investing itself is subjective in nature and not objective or algorithm driven like many people assume it to be.

As I mentioned at start that past numbers don't translate to same for future, you should still look at a business's or company's past. A business which acts like a black hole for capital would continue to do so in future too and keep on raising or sucking more capital year on year to survive. A business which hasn't gone anywhere in past 10 years is unlikely to go somewhere in next 10 years too. A business run by dishonest management would continue to churn out fraudulent numbers in future too in order for growth to appear real. So if a business has done good things in past there are good chances that good things would happen in future too, provided surrounding conditions are still favourable for that business to survive (which your understanding of that business should tell).


The investor of today does not profit from yesterday's growth.

Sachin

Would Opera's new move take browsers and eventually WWW to a new level?

I have long been big believer of peer to peer type of network model than client-server or cloud based model. Reason I think so is that unlike before there is not much difference between client and server. Client i.e. you personal computer today has sufficient CPU and memory capacity to act like a server. Also with advances in communication technology we get high speed broadband right at our doorstep. The difference between client and server is narrowed down a lot as compared to what it was two decades back. Same machine acts as server at some places and is used at client at some places. Thus every machine is essentially a peer to others.

Most of the current and new web 2.0, is still working on a client server model and now a new buzzword called cloud model. Do we really need some centrally located servers or cloud of servers for our basic needs of networking, when same can be done right from our desktops or now even from mobile and other hand held devices. All we need is that these machines should be uniquely identifiable or have an IP address. We then can run a server right where we are and then these servers do the job of connect to other such clients and in a way build a peer to peer network. Skype is a good example of same and torrent based file sharing another. They all run on this peer to peer logic and are fairly popular.

Next step is to make general www peer to peer. I think first step here is taken by Opera. They have come up with a concept called opera unite. What opera has done is that it has placed web server at every client. This way everyone runs their own host device, with their own applications running on their own hardware, which can then be accessed from anywhere using any web browser. All this is to be rolled into their web browser. Opera is also providing extensive documentation to developers to create their own 'unite' applications and make it available www wide. Only drawback is that all peer to peer connection would be routed through the unite proxy. I think with time this limitation would be circumvented and internet would really be peer to peer they way it was originally envisioned.

Would other browsers particularly Mozilla's firefox join the bandwagon. If they do so then there would really be a need to standardize a p2p protocol to enable cross browser communication. Is this next step towards web 3.0 or semantic web, I don't know, but sure something to look forward.

Some of the web transactions still need to be client server, however much of the social networking which we do today can easily be done peer to peer (after all this is what social networking is about - peer to peer interaction). Would this change or endanger the current social networking platforms, I don't know, users would decide that.

Chains of habit are too light to be felt until they are too heavy to be broken!

Sachin

How big can Indian IT services market grow

Today I was reading an interesting article. This is by our own NASSCOM. Some of the key numbers in this article are:
1. We exported $47 Billion worth IT software and services in this fiscal year.
2. Domestically we consumed around $13 Billion worth of IT software and services this fiscal year.
3. That makes current size of our IT software and services market to be around $60 Billion.
4. This sector now employs around 2 - 3 Million workers, which today is still a very tiny fraction of around 200 - 240 Million non-agricultural workers we have to feed.

We have big hopes from this sector. Some pundits have said what Oil did for middle east and Manufacturing did for China, IT is going to do that for India.

As I scroll down the article, I find global IT software and services sector to reach $1200 Billion by year 2012. Assuming some growth after that too, it should reach around $1500 by year 2020.
Assuming outsourcing to India is still a preferred option by then and we capture 10% of the market, our size of IT market is going to more than double to $150 Billion. I think that is a reasonable estimate of size of Indian IT market in next decade or so (a decent long term view point).
We are employing around 2 - 3 Million workers now, it may generate maximum employment for say 10 Million workers by then, which again would be a tiny fraction of some 300 Million non-agricultural workers at our hand.

If we ascribe this size to our Indian IT market, then lets look at a valuation of one of the leading listed Indian IT company.
It has a market cap of $20 Billion and revenues of $4 Billion. So it has a share of around 6 - 7% of total IT revenues in this sector. If we grow to $150 Billion by 2010 and this company maintains same percentage share, it would have revenues of $10 Billion by then. What would be its profit margin. That depends a lot on following factors:
1. Labor cost
2. Rent of Land cost
3. Last but not the least value of Dollar against Indian Rupee.

Would the exchange rate stay at around 45 Rs/$ or reduce to a lower level. With so much of dollars printed recently its hard not to justify a lower rate.

Assuming a liberal 20% margin by then it would earn around $2 Billion. So we are today valuing a company at 10 times what it may earn more than 10 years from now. Is this something justified. Well all depends upon our risk perception. Also depends with how much confidence you can predict a long term earning profile of a company. Given a lot of risk factor to exchange rates and also given a liberal estimates for the size of IT industry and this company's revenues, I might not like to pay more that $5 - 6 Billion for its entire business. Today its valued at $20 Billion.

Certainly Indian IT industry has a long way to go forward. I am very positive on Indian IT sector in general. However I also feel that valuation of many companies are done with a lot of optimism.

To conclude by a quote from Mr. Warren E. Buffet:
It is optimism that is the enemy of the rational buyer.

Sachin

Making the browser intelligent

With Mozilla Firefox giving flexibility and framework for independent developers and OEM vendors to add on features and functionalities to the browser, it has opened a whole new chapters of how browsers would be in future.
Today there are many extensions built by vendors which can be loaded on to the browser on demand. Most are written using JavaScript and broadly are of two types.
1. One client based. All the extension code is executed on the browser and attempt is to provide some feature extension to the browsers capabilities.
2. Second client server based. The code again is executed on client side but the data is send to the server, usually a service provided by the vendor itself and the combination of client and server execution is used to serve the user better.

This second type of extension is something of interest to all of us. If we look it leverages the resources on both users machine and central server to provide the service. The service can be of many types, typically custom information based on the content. Further the client can be an intelligent agent trying to know the user better, so as to always send relevant content.

Today there are many web 2.0 sites which claim to serve its users better. To think of it I don't need to register to the any such sites, rather have an extension built into my browser and I am free to use my computer. I believe in future I can do all the tasks using applications embedded withing my browser, say writing mail, preparing a doc, a presentation etc so using computer would mean using the browser. So with time my browser would know me better and serve me better.

Like in web 2.0 we have these flood of social sites, I think with web 3.0 we would have such agents popular with every vendor would like to us to use their agent and may be even pay us to use it.

Adsense revisited!!!

Sachin

what would web 3.0 look like

Web 3.0 would definitely make waves.
As pc getting more powerful with faster cpu and more ram, the line between pc and a server would continue to narrow.
Broadband would be ubiquitous.
Browsers would be enhanced so they can serve as a mini servers and be intelligent to process lot of content.
Browsers would interact with other browsers directly using p2p protocols, giving users unique browsing experience.

The whole web concept would change, semantics would be built every where, with the intention of attracting browsers rather than users and users solely relying on browsers to serve them whole content automatically without them having to do lot many things.

As am typing my project report on my favorite author, my browser is surfing across wikipedia and blogs to show me key information about that person one a side screen, same time amazon is displaying ads about his books to by just below that.

No more adsense and adwords where I get the ad only if a particular site has registered for this service or not. Reach the browsers directly without any "middle man" partner sites.

Welcome to the new world!

Sachin