“The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.” – Warren Buffet
“Mr. Market is a “manic depressive” guy who has frequent bouts of extreme mood swings and is either very ecstatic or depressed on a given day. 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” – Benjamin Graham, guru of Warren Buffet and author of investing bible “intelligent investor”
These quotes by the most revered and admired investors of all times, are deep and astute insights out of decades of successful experience in navigating through turbulent markets while creating long term wealth.
While market eventually follows the fundamentals and earnings of the businesses in long term, it goes through extreme mood swings or bouts of pessimism and optimism in short term which could be driven by multiple reasons like easy liquidity, commodity prices, macro factors like state of global/local economy or inflation, geopolitical reasons like wars, government policy actions/ inactions, central bank’s monetary actions, interest rates, exchange rate fluctuations etc. Since 95% of market participants are short term speculators(including FIIs, Mutual funds, big brokerage firms who pay lip service to long term investing and retail investors) who try to beat each other to the last dime, they end up overreacting on each and every anticipated event (pre as well as post the event). Recent examples have been global markets penchant obsession over US Federal bank potentially hiking the interest rate, potential Greece exit from Euro, In India, we had markets over-reacting on IT firms’s not so good performance in quarterly earnings and FIIs pressing the panic button on MAT issue (Tax dept. sending notices to FIIs asking them to pay MAT taxes for yester years).
With my limited intelligence, I don’t get to understand why and how US Fed bank hiking interest rate by 0.25 to 0.5 % or Greece(accounting for <0.5% of world economy) exiting from Europe, Income Tax dept. issuing notice to FIIs on MAT(which can be successfully challenged in Indian courts) can negatively or positively impact the business models and long term earning prospects and hence long term intrinsic value of any of my favorite businesses/ stocks like Yes Bank , Indusind Bank, Aurobindo pharma , REC(Rural Electricity Corporation), Bajaj Finance , LIC Housing Finance or Tata Motors. However, these weird set of short term factors have invoked the markets to get into depressive and pessimistic mood. Consequently , the market has painted all the businesses/stocks(good quality as well as bad quality) with the same broad brush and hammered the prices down as if there was no tomorrow. Interesting fact is that market has not spared even those businesses which have come up with great and consistent results this time like Yes bank(with earnings up by 28%), IndusInd bank(earnings up by 25%) and Housing Finance companies like LIC Housing Finance and India Bulls Housing Finance(which have again done very well).
Now, lets talk about IT companies on which market has been very brutal in recent times, hammering their stocks by 8-10% last week. I will again term this “shortsighted over-reaction” as market participants need to look beyond and behind the quarterly numbers. TCS and HCL Tech(my favorites in IT sector) were hammered badly for not showing a decent quarter to quarter revenue growth and missing the market’s revenue estimates by a mere 0.8 to 1% . What the market didn’t give enough credit was both these companies showed a very decent revenue growth on year to year basis (18 % & 15%), under the current difficult situation of global slowdown and cross currency fluctuations. What the market didn’t also give enough credit was that they showed positive and decent growth on revenue quarter on quarter, on constant currency basis (1.8% & 2.7%). These companies got hammered down due to bad prevailing sentiments though they have been robust and stable performers under a difficult and dynamic global environment for IT companies. Markets obviously couldn’t see beyond the quarter and below the skin of the numbers and over-reacted as it was already pessimistic.
Just a few weeks back, market was not talking about Indian markets being over-valued with respect to earnings but suddenly everybody is talking about Indian markets being very over-valued. Fact of the matter is that market is not over-valued at all with 1 year forward PE at 15 to 16 (same as the long term average of the market) . Besides, India is the only bright spark in the entire emerging market and the fastest growing economy in the world now (beating China this year).
Whenever there is a panic correction in the market or in a specific sector due to market over-reacting to a temporary bad news, it’s a happy and delightful opportunity for value and long term investors like us. It’s the time when I wake up with my tongues out and hunt for high quality stocks for long/medium term (3-5 years horizon), available at cheap and attractive prices.
For many of the retail investors sitting at the sidelines who have missed some of the rally in 2014, this is a good time to buy some fundamentally strong businesses with excellent long term growth potential , high returns on capital/equity, strong balance sheets and competent managements which might be available at attractive prices , courtesy the latest correction. Since these corrections are temporary in nature in this secure bull market (whose trend will be up for many years),one should be buying quality businesses at every dip or correction of market or your businesses. I am investing in many of my 2015 model portfolio business/ stocks today as they have needlessly corrected in these pessimistic conditions like Yes Bank, REC, Bajaj Finance, Tata Motors, Tech Mahindra, Dewan Housing Finance & few other strong businesses in my watchlist like IndusInd bank and Indiabulls Housing Finance .
The markets might dip further (by 3-5%) as its sitting just above its 200 day moving average or might move sideways for many months till we get next triggers like corporate earnings growth & next phase of reforms like land acquisition and GST bills etc. But that shouldn’t worry long term investors like us (with 3-5 years horizon) as its futile to perfectly time the market. Buy in installments at every dip or correction in your favorite businesses/ stocks.