Ola Electric Red Flag: Investors Beware 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

A friend called me the other day for my feedback on the Ola Electric IPO.

Here's what I did.

I opened the pdf version of the DRHP, I went to page number 245, which has the company's P&L statement for the 3-year period ending FY23 and I glanced at it for a grand total of 1 minute.

I then closed the file and informed my friend that in investing, there is investment and then there is speculation.

The boundaries between the two are not always well defined.

One has to use one's own experience and judgement to decide the boundary between investment and speculation.

Based on how I define my boundary, Ola Electric is more speculation than investment. Yes, that's right. Ola Electric may not find a place on my watchlist of investment worthy stocks.

How did I arrive at this decision in one minute flat? What convinced me that Ola Electric does not have the qualities to be a great long term investment, at least for now?

Well, I will tell you all about it but first let me tell you an interesting rule that Charlie Munger used to swear by. In fact, even Warren Buffett swears by it.

Charlie Munger once commented that both he and Buffett have three file organisers on their desks. They have labelled them 'Yes', 'No' and 'Too hard'.

If anyone sends them a business or a stock to analyse, it goes into one of these organisers. So, any stock they are given to analyse, they either 'yes', 'no' or term the stock as 'too hard' to analyse and move on.

Any guesses where the highest number of companies end up? Well, they end up in the 'Too hard' basket.

That's right.

Buffett and Munger know nothing or very little about a large number of companies in the US and hence, they label them 'too hard' straightaway and don't waste a lot of time digging deeper into them.

This way, they can focus their time and attention on the limited number of companies they understand and where they believe they have an edge over others.

Put it another way, they have a very good understanding of their circle of competence and rarely venture outside of the same.

As you are aware, there are thousands of companies listed on the stock exchanges. This number could easily run into thousands. And as an individual analyst, it is impossible for me to keep track of each and every stock.

Which is why, I also have my 'too hard' basket where I am very clear, which kind of stocks belong to this basket and which don't.

Ola Electric, with its issue price of Rs 76 per share, was certainly one of them the most anticipated IPOs in recent times. However, for me, it straight away goes into the 'too hard' basket as I highlighted earlier. The simple reason being that I don't like loss-making companies.

Yes, that's right. You see, one of the criteria that I have for my stock recommendation is that the underlying stock or company should be profitable for at least 8 of the last 10 years.

Losses in 1 or 2 years out of the last 10 is something that we can understand. However, if the company is consistently loss making and has a lot of red ink against its name in the past then I consider it as outside my circle of competence and toss it away into the 'too hard' pile.

Therefore, when I looked at the P&L statement of Ola Electric, I saw losses in all the three years till FY23 and this is something I was not comfortable with.

Ola Electric may have a significant market share and a huge topline as well. But if it has not figured out how to turn those revenues into profitability as well as cash flows, then it is a big red flag according to me and I tend to not keep such stocks on my watchlist.

Hence, while Ola Electric could be outside my circle of competence and may fall into the 'too hard' pile, there are other investors for whom this may not be the case.

They may have a good understanding of the company's business and where it is headed.

Their circle of competence need not be the same as mine and their 'too hard' pile need not have the same companies as mine.

The whole idea of having a 'too hard' pile is to focus your time and attention towards your best ideas and not try and chase something that's very difficult for you to analyse.

My 'too hard' pile mostly consists of stocks that are bad quality or where I am not able to get a good grip on the company's valuations.

If my valuation model for a company is complex and runs into multiple rows and columns in an excel sheet, it is not a good sign in my view.

The moment I see one of these red flags or even both, I simply stop right there and move on to some other stock.

And this is why it didn't take me more than a minute to comment on Ola Electric.

The second I saw those losses on the company's P&L statement, the 'too hard' trigger was activated in my brain, and I advised my friend to proceed with caution.

Of course, it is quite possible that the stock may turn out to be a great long-term investment. However, this is investing and not Olympics.

You don't get any extra points for trying to attempt the more difficult jump.

If the same returns can be had from a simple and easy to understand investment, why go after the more difficult one.