Monday, April 30, 2007

What went wrong with Aztec?

Well, about 6months back, I was really bullish on Aztec Software. It was a company that was really growing fast and had 2 consecutive years of 100% growth. I looked at the numbers and made forward projections based on past record. I also had at that point in time made reasonable trading profits from Aztec (bought at 75 and sold at 95, bought again at 90 and sold at 120). So, I guess I was biased in my point of view. And I made two fundamental errors.
1. I projected 100% growth based on only 2 years record. The problem with that is it becomes increasingly more difficult to grow as the growth increases because of the increasingly larger base effect.
2. I had assumed a PE expansion based on increased growth.
The learning from this transaction is 2 years data is too less to make future projections on. Also, if growth is not as expected PE instead of expanding actually shrinks and creates a double whammy!! So, its better to be much much more conservative in projections and look for a margin of safety to insulate against losses.

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