This is interesting times for Indian economy and stock markets, post the budget.
People (including me) had high expectations out of Chidambaram’s budget which failed to deliver on many counts including bold moves to grease the economy and markets. For example, it was negative or absent on clear timetable for GST and DTC roll out, bold moves to encourage/ de-bottleneck investments in infrastructure, power and real estate, Reduction of Income Tax exemption or deduction limits to improve savings rate /investment rate, giving incentives to divert savings from real estate/ gold to financial savings, mandating PSUs to step up investment using the cash pile they have etc. The only good thing about the budget was Chidambaram’s delivering on FY13 goal on 5.3% fiscal deficit and his plans to reduce the fiscal deficit to 4.5% by FY14 end.
Though the budget was positive for news on fiscal deficit, it was largely disappointing and an opportunity forgone in terms of urgency/ speed of reforms and bold moves. However, even more interesting and disappointing was market’s reaction post the budget in the last 4 weeks. Firstly, the market over-reacted on the Mauritius related confusion when market players assumed that Govt. is going to change the rules of the game for investments routed through Mauritius( in the form of the Tax Residency Certificate (TRC) being no longer just a necessary and sufficient condition).Govt. tried to clear the air few days later on the issue. After that, the global markets including India over-reacted on the Cyprus debt crisis issue. Just imagine the world markets over-reacted on a small economy contributing to $24 Billion of GDP(< 0.1% of world’s GDP), perhaps because it’s a safe haven for routing investments and perhaps because hyper market players thought that the bank run in Cyprus could trigger a bank run and collapse of European union. Then, market over-reacted a few weeks ago on some allegations of money laundering on some employees of 3 top private banks (ICICI bank, Axis bank and HDFC bank).Last week, Indian stocks fell because of weak global cues in U.S. and Europe. US stocks had the biggest weekly decline of the year for the Standard & Poor’s 500 Index, after data showed the nation added less than half the number of jobs economists forecast in March.
Now all these events were temporary bad news (facts or perceptions) which could not impact the sound business models of the best businesses in India. Yet the prices/ market valuations of the stocks of all the businesses (including blue chips among the large caps) were hammered and butchered. Cyprus & Mauritius related news or employee related money laundering allegations can never alter the business model or the fundamental economics of sound companies in India. So, why did the markets react so badly on these news and pulled down the prices of some of these blue chips by 10-20%.
Benjamin Graham (Warren Buffet’s mentor) and Warren Buffet were great fans of the over reactive markets and made their best investments during the times when market was reacting to temporary bad news and hammering solid businesses down without any fundamental changes in their businesses economics/ potential.
Graham once said that “market was a voting machine in short term and weighing machine in long term”. That means markets are unpredictable in short term but eventually prices the value of the assets right in the long term.He likened market to “manic depressive” guy who had frequent bouts of extreme mood swings and was either very ecstatic or depressed on a given day. He called the guy “Mr. Market”. He taught his numerous disciples that if you get carried away by Mr. Market’s wild mood swings, you are doomed as an investor. However, if you learn to exploit his mood swings in a wise manner, you would be a winner.
Efficient market theory is one of the key theories of modern finance. .Widely taught in all Ivy league universities, it says that its impossible to beat markets consistently as markets are super-efficient in capturing all the relevant and latest information and events Therefore no living mortal can achieve better returns than market consistently. Many of the big investment gurus have scoffed at the efficiency of the market .Warren buffet once said that “if markets were so efficient as the academicians would like us to believe, then I would have been a bum sitting with a tin cup”
Warren buffet discovered that because 95% of all participants try to beat each other out of the quick buck, markets are very efficient in the short term and hence its impossible to beat the market consistently from a short term perspective. However because of the same short term orientation/ shortsightedness and over reactiveness, markets are not very efficient from a long term perspective – sometimes grossly inefficient That’s why Benjamin Graham also used to call Market as “manic depressive” who is either too happy or depressed due to short sightedness and over-reactiveness. Warren once said famously ” Be greedy when everybody is fearful and be fearful when everybody is greedy” . The best investments which these investment gurus made were in these uncertain times and “temporary bad news” events when the market irrationally painted every business (even the best blue chip businesses with strong business model and strong balance sheet with durable competitive advantage) with the same brush and hammered them down.
Now coming back to the best Business or stock picks in India, available at mouthwatering prices, in the current over reactive situation, following are my Top 10 recommendations out of my 2012 and 2013 recommendations.
Business Current price(INR)
Axis Bank 1229
ICICI bank 998
Coal India 309
Power Grid 104
LIC housing Fin 223
All these players are dominant or big players in their sectors with consistent growth, robust business models with negligible impact from these temporary bad news or events, well managed companies by competent management teams & strong balance sheets with sustainable competitive advantages in their areas. And they are available at good prices now with respect to their intrinsic value or historic PE. We should invest in these businesses at every dip(as the market might dip further) and sit tight on them for few years(3-5 years of investment horizon) to realize the true growth potential of these businesses. If you don’t have that investment horizon, then you are wasting your time on my blog.