Festival Feelings

Our own experiences and understanding of Businesses is that its future can never be predicted. How else do you justify the extra adrenalin bullishness 3 years ago when Yahoo was offered $50 Billion and the then CEO Carol Bartz refused the offer expecting growth to propel into dizzier zones? And how is that today Yahoo may not even get $ 10 Billion offer? Would we have expected Dhirubhai Ambani, an uneducated Indian to create an industrial behemoth called Reliance Industries? Or would we have expected that his Wharton educated sons would pull these companies apart? Businesses are subject to unpredictable changes. From it then stems the truth why Benjamin Graham advocated investments at all times regularly, no matter what the season said. That is why extreme bullishness is a recipe for failure in capital market. And that is why we hear CEOs just say that something remarkable is about to happen... they do not know what exactly it is.

A thought that has been intriguing me is If a stock is valuable, why is someone selling? The one, who sees future earnings go up, buys. By the same reason the seller believes the future earnings are going down, all at the same time. Perception and computation of future earnings is what makes one buy or sell. Its the perception and Not the real earnings. Simply stated, when we speculate the risk is with us, when we postpone the buy decision, the risk is with someone else. Today we find many postponing investments, speculating a major event is likely to happen and cause correction to the markets. Like the CEO who does not know what the event is, but expects something world changing is around the corner. The average exposure of Indians to stock market is muted while in the USA it is about 35%. Hence the chances of Indian economy collapsing are limited. We can't say the same about stock prices however.

No wonder then that I heard Sonam Kapoor call Stocks as gambling and that she invests in real estate. What assures there is no bubble in real estate? I had the opportunity to hear an IIM Professor of Macro Ecnomics and I asked him whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomics methods to know if housing bubble is building. He said that the Rental Demand should indicate and ideally move up along with the increase in real estate prices. If the real estate prices move up as an exception and rentals continue to be subdued, then that is an indication of a bubble forming. But you can never predict with certainty when it would burst. That explains how we become insightful and wiser after the event.

Let me conclude my narrating yet again an interesting thought coming back to stocks. It was in a travel that I was sitting beside a Chief Information Officer of an IT company. My favorite way to break ice is to talk about stock market and almost instantly I remember cutting ice and conversations grow. I was keen to learn from his experiences as I consider peer group learning invaluable. It is unbiased, nobody needs to leave an impression and can be open without feeling threatened. He was relating to how he learnt a few tips from his uncle. He was a horse racing enthusiast. In horse racing, the big money is on betting which horse will come first. The risk return ratio is skewed against us. The uncle would constantly bet on lower stakes with lower risk return, but over multiple races, he used make a decent sum. If we were to extend the same theme to stock markets, I would agree that it is possible to seek investments with limited upside while limiting downside considerably. With pragmatic expectation, it’s a science if not art, that one can practice to earn a decent return. Investors loose less money by overpaying good quality businesses than by purchasing low quality businesses at times favorable to them.

Here's wishing you all and your families a very happy Diwali. May this festival of lights bring in peace, joy and good luck for all of us.
Naresh

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