What The Reluctant Fundamentalist teaches you about investing

I love watching movies and I came across a very interesting bit, in the movie The Reluctant Fundamentalist, that I will share with you. A particular scene in the movie speaks a lot about the investing process and how one should not get carried away by the world of numbers.

 

The Reluctant Fundamentalist  – movie background

The Reluctant Fundamentalist poster

This is a tale of a young man from Pakistan who heads to the US for studies. He is shown to be living the “American dream”. Straight out of Princeton, he gets into a highly sought after job with a consulting firm. He falls in love with the daughter of the consulting firm’s managing partner. All is well in his life till 9/11. He is then subjected to racial profiling by cops at airports and on the street. He feels he is being singled out because he is a Muslim.

He is a consultant hired by companies who want to understand and maximise their value. This usually translates into taking decisions on restructuring divisions and laying off people. As is expected, outsiders, like the consulting firm, are hired to do the dirty job that no internal manager wants to do. The consultants do not take into account the emotional and social costs involved in casually closing entire divisions.

The protagonist gradually becomes disillusioned with his professional life. On the personal front he is not comfortable either. He has relationship issues with his girlfriend.

Post 9/11, he starts questioning his identity and whether he should be in the US at all if it is so unfriendly to outsiders. He wonders whether he is running away from his roots.

He heads back to Pakistan. In the process, he lets go of all ties to the US, both professional and personal.

This is one thread in the story.

There is another thread that runs throughout this fine movie. It covers the US involvement in the “war against terror” as they call it. This movie raises hard question about the activities of the US. It questions the “collateral damage” which has to be accepted in light of the ultimate goal of killing the bad guys. It highlights the universal human tendency to pit “us” against “them”. This movie also boldly showcases the greys present in these issues. There are questions with no clear answers. The movie presents different sides and leaves you thinking far after the movie ends.

If you are a movie buff, go ahead. You cannot go wrong with this movie.

 

What is the investing connection?

There is a scene in this movie where they show the crop of fresh analysts who have been hired by the consulting firm. All of them have gathered in a large conference room. One of the senior partners walks in and hands each of the analysts, a binder that contains data pertaining to a company. The analysts are asked to look at the data and calculate the value of this company.

What does the company do?

It is a startup which possesses a new technology that can teleport people across distances. Call it molecular dis-assembly and re-assembly if you will.

Remember Star Trek. One of the humans walks into a chamber. The body is broken down. The body is re-assembled in another chamber somewhere far away in space.

This company is aiming to commercialize this technology.

This is where it gets interesting.

They are given a limited amount of time, an hour, and a huge amount of data to process.

We see the analysts after an hour. They present their analyses to the senior partner. We see one analyst who has calculated a value of $48 billion with revenue growing at more than 50% per annum for the first two years.

The partner cuts her off right there.

He then turns to the protagonist, Changez. It is an interesting name which has particular meaning (or irony) in the context of the movie (Genghis Khan was one of the most famous Islamic imperialists).

Changez leaves the room silent when he says that the company is worthless if one considers the current assumptions.

The partner is intrigued and lets him speak. Changez quotes a market research study from the binder which says that 72% of potential travellers would never use such a service, even if someone promised 100% safety.

It is implied that most analysts overlooked this information in their binders.

This leads the partner to ask Changez whether he feels that the company is worth nothing at all.

Changez replies that the company could adopt a different business model where the same technology could be used for shipping goods.

The premise of high technology might seem fantastic but the thought process is significant.

 

What can you learn from this scene?

  • Don’t start playing with numbers, because they are “available”.
  • Don’t build castles in the sky. It is very easy to “project” estimates of future revenues and profits.
  • Numbers in financial statements are based on activities in the “real” world – operations, competitions, market conditions and decisions that people take.
  • In all probability you will be making mistakes if you have not reviewed qualitative assumptions about the business first.
  • Discounted cash flow analysis is a dangerous tool if not used right. It gives you false confidence. Don’t fall into the trap.
  • First study the business.  The valuation study should come last in the investing process.

If you know of any other movie that contains a good reference to investing let me know. I would love to hear your comments.

 

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Comments

  1. Jenish Mirani says

    I know some movies about investing which are mentioned below,these movies are must watch movies…
    1. Boiler.Room.2000
    2. Capitalism – A Love Story
    3. Inside.Job.2010
    4. Margin.Call
    5.Trading.Places.1983
    6. Quants -The Alchemists of Wall Street
    7. Enron – The Smartest Guys In The Room
    8. Rogue Trader – The story of Nick Leeson
    7. Thank You For Smoking
    8. Too Big to Fail
    9. A Good Year 2006
    10. Catch Me If You Can 2002
    I have seen all these movies, and have learned some or the other new concepts from each of them.I hope you like them

  2. Anil Kumar Tulsiram says

    Good One Kunal

    I agree with you understanding “real world operations” of the company is most important. Its important irrespective of whether historical numbers are fantastic or mediocre. One who simply went by past historicals might have outright rejected relaxo in 2008 and now see where the business and stock is….

    • says

      Yes, the Relaxo post by Prof. Bakshi is a good example. I will be sharing a study of SRF and how business study is important. It is a prime case of where financials will mislead you if you don’t dig deeper.

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