‘Only when the tide goes out do you discover who’s been swimming naked ‘– Warren Buffett.
Now the tide (liquidity and enthusiasm) has gone out and the visible symptom of years of mis-management is the crash of the rupee. I am extremely pessimistic about the macro picture and the ability of our political system to fix it.
No, I am not blind to the risks and as depressed about the country as any other Indian. Let me explain my reasoning behind this apparently contradictory stance.
So if you have some capital (equity, real estate, cash or FD) with you, what are the options for it ?
The second option is real estate. I have been pessimistic about real estate for a long time and with low gross yields of 2-3%, think it is overvalued. However if one has the skill to find some undervalued property and can hold on to an illiquid investment for some time, then this could be a possible option. At the same time, if you are thinking of using a loan to finance it – forget about it. If the currency rate continues to depreciate, we may see a further rise in interest rates (which has already started) and the loan which you are planning (or already have), may become even more expensive.
I know that readers of this blog already know where I am going with this logic – equities. But before I get there, let me digress a bit.
The last option, which seems to be the most risky is equities. The reason it appears to be risky is due to the vividness of the risk. If you own a stock and inflation rises, the impact is visible immediately. On the other hand, options such as cash or real estate seem to be safe as we do not get a quote on it daily. However that is just a false sense of safety as the real value is eroding silently. A fixed deposit or debt instrument in the last five years has lost value due to inflation and so has real estate (if it has not appreciated by more than 12% per annum).
One can easily point out that equities are no better as the index has dropped in the last five years and hence the loss is even higher in real terms. That is true if you have been invested in the index for the last few years. At the same time, there are several companies such cera sanitaryware or crisil which have done quite well during the same period.
Let’s look at the same point mathematically – If you are able to buy a company, which is earning around 20% return on capital (and can do so for the next 3-4 years), one is likely to double his money in this period (unless the economy implodes completely) if the valuation remains the same. Finding such a company is not easy, but if the market keeps dropping, one is likely to find good companies at attractive prices
– You have some amount of skill in finding good companies. Investing blindly worked only from 2003-2008.
– You don’t need the money in the next five years. If you are retired or need money in the near term, please don’t think of putting it in the stock market.
I keep a wish list of stocks – these are companies which I would like to buy, but the price was never attractive in the past. One such company was crisil, which I bought in 2008 and have held on to it since then. There are a few other companies such as ITC , Marico (and more) in the list which I am watching. If the market keeps dropping, my wish may come true.
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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.
Nice perspective as always. Well certainly the rupee has taken an unexpected hit and economy is going through worst phase, I was surprised that you didn't backed any infra companies which are healthy but going through prolonged bad phase. Also, I would like to hear your views on Mastek, a software company regaining its lost ground and is graham's play with cash on books equal to market cap. If turn around happens as expected, the returns should be healthy.Regards,Vikas Kukreja
I think now ( or was 2-3 weeks ago) a distressed investment strategy would have helped picking some good stocks to hold. Eg MCX Offcourse distressed strategies focus on debt and the key is to use the same principles with an innovative valuation methodology if applied to equities.
An excellent post,this is the opportunity a value investor waits for.When there is blood on the street,fear in the market,this can create distortions in price which can be very favorable for the discerning investor.
Hi Rohit,I liked your comment:'If you invest (money and time) in developing your skills and become really good at whatever you do'Related to above comment, What would be your thoughts on a person working in product development in embedded/electronics kinds of domain in MNCs (like HP, Juniper etc.)? Is it worth while pursuing skills in such careers? Also, your opinion on overall IT careers (services or product development)Thanks-Raj
Hi Rohit,Do you invest outside India?If yes, through which broker?icici seems to have stopped that & kotak is asking for 6.5 lakh deposit.Regards,Amit
hi Rohit,Can you help me understand why Bajaj Investment Holding Co. which owns ~30% of bajaj Auto and ~40% of Bajaj Finserv is selling for only ~8500 crore. Instead if someone independently purchases ~30% of bajaj Auto and ~40% of Bajaj Finserv, he will have to shell out ~21000 crore. Apart from these two mammoth ownership, Bajaj Investment Holding also owns several other investments and the company is debt free.thanks,Nitin