Posted On Monday, Dec 29, 2014
Television commentators are a strange breed especially the ones who lay out investment advice on multiple business channels. Most of them have the attention span of a housefly and long term investing usually means investing with a view of one week!
In August of 2013, when the fears of US tapering led to sharp correction in global equities and emerging market currencies took a tumble, one could hardly find an expert recommending investment into equities. It was all gloom and doom, with greater downside to come, India was clubbed into the fragile five with very weak external accounts. Equities since then have rallied close to 100%!!
Guess what they are recommending now, high allocation to equities, the common language used is ‘even if the market corrects it will not fall more that 5%-10% and one can allocate even more at that point, given that India is at the start of a multiyear bull run’. Why should Indian equity markets not fall by more than 5%-10% is a mystery to me, given that the rally has been so sharp, without a corresponding up take in corporate earnings and the mid year economic review paints a fairly dismal picture of the revival in investment cycle. But the ‘experts’ are saying it, so must be true and the crowd will behave accordingly.
The price of any share is a reflection of what the majority believes is the correct value. It primarily combines two aspects one is Investment value, based on pure facts derived from the current state of company financials, competitive environment, state of the economy, balance sheet and management quality etc. The other - speculation value, based of growth rate of future earnings, forecast of FII flows, possible PE multiple expansion, regulatory action etc. It is the latter which tends to have a disproportionate share of news flow coverage while the former barely gets a mention. With expert after expert propounding the story of an onset of a multi year golden period for Indian equities, the fear is the speculative element of company valuation has far overtaken the facts and the disconnect between ground reality and valuation of companies grows wider by the day.
At Quantum, we make it a point to avoid listening to these so called experts. Each company that our research team covers has a predetermined buy limit and a predetermined sell limit based on the facts on the ground and our understanding of investment value. If a company comes below our buy limit irrespective of the opinion of ‘experts’, the stock will come into our portfolio, similarly if the company exceeds our sell limit and we have no reason to upgrade our long term earnings estimate, we will exit the stock.
The last few months has seen us exit quite a few stocks as we believe they became more expensive relative to their investment value, raising the cash levels in the fund. Our constant check of ground levels facts (and we know we can be wrong as well) has so far not led us to believe that our earnings estimate of companies are way off the mark. And so against ‘expert’ advise of the onset of a multi year bull run, we remain on high cash. We wait patiently for value to emerge. Investors trying to build a portfolio for the long term could also follow a similar pattern. Would urge all investors to check with their financial advisors before taking any investment decision, no matter how loud the volume of the television ‘pundits’.
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