Spotlight: Investing and the Act of Looking Stupid

The act of looking stupid is one of the most difficult tasks of being an investor in stock market. And this is especially when you see ‘smart’ people all around you, people who seem to be making no mistakes and doing nothing wrong.

It was exactly nine years ago (how time flies!), when the Indian capital market was gearing up for its biggest IPO ever. Reliance Power, which was set to raise Rs 11,000 crore, received bids worth Rs 750,000 crore as the offer was oversubscribed by 73 times. Everyone and his brother-in-law who subscribed to the IPO looked smarter, even as my family members whom I had asked to avoid the issue by far, seemed disturbed on my recommendation.

So I looked stupid even as there were stories floating all around how people borrowed money and sold their properties to apply to this IPO that was sure to succeed. In fact, we were the only research house in India that had asked its clients to avoid the IPO and we had received a lot of brickbats for the same.

I, being the power analyst and the guy who wrote the IPO analysis report on the company, did a DCF valuation of the stock discounting free cash flows for the next 25 years (the general norm for DCF is 10 years)! My ideas was to lengthen the DCF calculation period by as much as possible and then see how the stock really stacked up.

The result of my DCF valuation then was, hold your breath, Rs 60 per share. In other words, my intrinsic value estimate for Reliance Power’s stock, after assuming the rosiest of picture for the business, came to Rs 60. The stock was offered in the IPO at around Rs 450.

If you had read my report then, you could have gauged the level of ‘stupidity’ I had shown by valuing the stock almost 85% lower than the IPO offer price.

“An overconfident, stupid jerk!” one of my analyst friends introduced me to his friend while telling him my mis-adventures in valuing the Reliance Power stock then.

Well the rest, as they say, is history. Even after adjusting for the bonus issue Reliance Power offered its shareholders immediately after the IPO, the stock is down almost 85% from its peak of 2008.

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