How Pranav took a 50% loss after being up 5x on Ricoh India

Pride comes before the fall. And sometimes a huge gain comes before a crippling loss. This is the story of a five-bagger return that was based on a fraudulent company… and how that quickly turned out poorly.

Here is the story in Pranav’s own words:

Who are you, what is your story?

Hi, I’m an investor based out of Mumbai, India. My business is textiles, but investing is something I enjoy and have been doing for the past four years. It is something I will do until I die. Investing opened my eyes to the ideas of constant learning and constantly updating ones’ beliefs, which I find to be extremely important and useful in life.

Where did you get the idea? What was it?

The idea I would like to talk about is Ricoh India. Ricoh is a multinational company based out of Japan. They are mainly into the manufacturing and services business relating to imaging (printers, scanners, etc). Ricoh India was essentially a trading company, selling the parent company’s goods in India. They branched out more into services (document managing services and variants of those) applying to many different industries. My thought was this is a hardware company transitioning into an IT services company, in a country with a huge addressable market. The broad based theme was the digitization of India.

The company was also growing at a CAGR of 55% over a five-year period and was probably the fastest growing IT company in India. They won huge orders from the Government and were working with most industry behemoths (banking, healthcare, postal dept.)

What did you do to research, understand, de-risk, and diligence the plan?

I think it’s better if I answer this question by saying what I did not do...

I did not do much.

I did not really understand the business and the various moving parts in it.

I did not form enough of my own opinion and borrowed other people’s opinions.

What did you think would happen?

I thought that the company would become one of the agents of digitization in India. They were performing a necessary task in helping modernize the country and its infrastructure. Keep in mind that most essential documents in India, are still kept in paper format and stored in boxes and cupboards.

What happened?

What happened with the stock price

1) I bought into it the company at a price of roughly Rs. 180 a share.

2) The price in a period of 1.5 years went to a high of Rs. 1080.

3) I averaged up my purchase price to roughly Rs. 600 a share. It became one of my largest holdings and unbalanced my portfolio.

4) It now sits at a price of roughly Rs. 300, suspended from daily trading.

What happened with the company

The company in this 1.5 year period failed to submit its quarterly filings for 6 months. The excuses given by the management and board of directors were explanatory enough (when you want something, you see the world in the way that best suits your wishes, NOT REALITY).

As a result the stock was suspended from trading and eventually the company had external auditors come in and check the numbers. It turns out that the company / its employees were suspected of fraud to the tune of USD 200 million.

End result: I lost 50% of my capital.

Why did that happen?

On the company’s end, it happened because not all people have the best of intentions and integrity in life. A fraud was committed and all shareholders were hurt.

On my end, I had bought this company without fully understanding the numbers behind it, or the business. It was a high growth company. Based on approvals by “Gurus” and the fact that Ricoh Company has an outstanding reputation, I did not do the required due diligence (nor did I know how to at the point).

Since the stock price went up by 5x, I thoroughly confused my luckwith skill. This led to an overdose of confidence, which led to me thinking “I don’t need to learn anything else and update my beliefs.” (I should have been actively looking for reasons to disprove my investment.)

When the price started falling on speculation and talk in the market I doubled down on my bet. This was based on what Charlie Munger calls “Chauffeur knowledge” not “Planck knowledge”. They were borrowed ideas, and borrowed opinions with copious amounts of confidence. An absolute recipe of disaster, and disaster did ensue!

The expression goes “There are two sorts of people: people who know that they don’t know, and people who don’t know that they don’t know”.

How did this all end?

It all ended rather poetically with a bubble bursting. If someone imposed the chart of Ricoh over any bull run and financial crisis in history, I am sure it would bear an uncanny resemblance. The emotional ride for me was identical to that of a bull market and a crash right after.

What did you learn?

In hindsight there were many red flags that screamed out at me. Some of them were:

• Reported earnings did not match the cash flows
• Managing director had vested interest in suppliers of the company (and displayed several traits of the Machiavellian “Dark Triad”)
• The company had taken on massive amounts of debt, which seems ridiculous now considering they were not manufacturing. There was no plant, factory, land, staff increases. I was too content with the ‘growth’ and the hopes of riches that it would provide.

These were just basic financial red flags that any rational observer would question. There’s an expression that goes “the closer you are to something, the longer it takes for you to see it.”

I took a very long time to amputate this rotten appendage from my portfolio, which caused me even more harm. It was denial about the scam, along with a laundry list of biases and misjudgments. A lollapalooza!

I also thought I was being contrarian once events unfolded (that people were being too pessimistic). To me there is a really fine hazy line between being contrarian and being an overconfident ass. The difficulty of having an actual (contrarian view which is closest to reality) is highly underestimated in most cases. To have a contrarian view, one needs to be able to argue the opposing case better than anyone on the other side can.

No one wants to believe that they will lose money, and no one wants to think that for too long if they do believe it. Our brains are hardwired to quickly brush away any cognitive dissonance under the rug. Our brains are also lazy and will always try to save mental energy. Doubt consumes a lot of mental energy! But it is something we have to learn to embrace as a rational confidant and not as a depressing overbearing neighbor. It is the only way we can actively disprove our best-loved ideas, which will make us more rational (hopefully).

To me there is a really fine line between being contrarian and rational and being an overconfident ass

I was fortunate enough to live to learn from this mistake.

What should we learn from you?

Most importantly: Success gives you pride and arrogance, Failure gives you humility and learning.

If I wouldn’t have had this failure and my good luck continued, I would have been setting myself up for an even more catastrophic failure in the future. Potentially something I would not be able to financially/mentally walk away from.

A benefit is that we can learn the things not to do, and that is the secret backdoor to success and more importantly a happy life, especially in a world full of inconceivable uncertainties.

I would also emphasize that we learn the most from our own mistakes unfortunately (as children and when we grow up too). As Bruce Lee said “A man sees further through a tear than a telescope.” It’s a good idea to learn from other’s failures because it is free.

“All I want to know is where I’m going to die, so I never go there”. — Charlie Munger

If you have a story of losing money and getting your ass kicked —write it up and share it with us! I’ll publish stories of all kinds contributed from readers as posts.(Anonymously if you prefer).

You are welcome to write it yourself. If you prefer, I’m happy to hear the story over the phone and turn it into a post for you.

Email me about your stories: Eric@iamaterribleinvestor.com

I look forward to learning with you.