Is this the best way to predict a company's future?

Jan 27, 2011

In this issue:
» China will have to keep buying US treasuries
» Auto industry could be the next big thing for IT industry
» Marc Faber gives one of his most provocative interviews ever
» India Inc is having a robust quarter so far
» ...and more!!

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Open any brokerage report and you will invariably come across one common element. The tendency of research analysts to predict a company's financials 2-3 years into the future that is. After all, crystal ball gazing is an exercise that is too tempting to resist. However, have you ever tried to figure out whether this exercise is worth the effort? Have analysts been able to correctly identify important turning points in an industry or a firm and helped you make tons of money or avoid losing the same? Certainly not we believe. The results have been dismal to put it mildly. Analyst forecasts have always come up short when it comes to predicting important turning points.

Thus, if forecasts aren't quite cut out for the job, what then is the best way to predict a company's future one might ask? We are of the opinion that forecasts shouldn't be made at all.

What better authority to turn to than Warren Buffett if you are not quite convinced. It is believed that the Oracle of Omaha has never ever in his investing lifetime tried to do any kind of future earnings estimates. All he has done is dig deep into the company's past track record and has tried to come up with evidence that the underlying business is as much resistant to any kind of change as possible. If in the last 10 years, the business model has changed 2-3 times, then it may not be a good business to invest in as per Buffett.

We sincerely believe that other investors should also do the same. They should ideally look into the 10 year financial history of a company and if at all they find evidence of frequent changes in the company's business model, then such a company may not be fit for investing after all. We believe such a method will prove to be far more useful than the other one of trying to profit from a financial forecast 2-3 years into the future.

Do you agree with our views or you have a different take on the situation? Let us know or comment on our Facebook page.

 Chart of the day
Gold, silver, copper, crude oil...the list goes on. Apart from the fact that these are all commodities, there is one more thing that they share in common. The prices of almost all of these commodities have tested multi year highs in the recent past. It should be noted that March 2009 was the month when most of these commodities began their ascent and have certainly not looked back since then. Today's chart of the day makes an attempt to plot the point-to-point gains of some of the top performing commodities from their 2009 lows to their most recent prices. As can be seen, with gains of more than 180%, copper leads the charts. Silver and crude oil aren't too far behind either. Going forward though, would these commodities be able to repeat their past performance? Certainly not we believe. But given how China and India are growing, inflation beating returns can at least be expected from these commodities.


Marc Faber recently gave what could be touted as his most unpleasant interview ever. He uninhibitedly criticised the US President for being a dishonest person and doing a horrible job. But that may be hardly surprising and scantily useful for investors. So what does he think about investments? Well, he thinks emerging markets and industrial commodities have done great so far and are poised for some correction. He foresees around 20-30% correction in the emerging market universe. He doesn't find China to be a good bet at the moment. On the other hand, the US has underperformed everything. And now there could be a temporary reversal. Though he thinks the S&P might correct around 10%, he finds the US Treasury the best place to be for the coming 3 months, if not more. Of course, he doesn't forget to point out that in the long run, US treasuries and most government bonds would be suicidal investments. So this potential hike in the US dollar would be just a temporary breather before it continues dipping further.

The third quarter of FY11 is turning out to be quite a robust one for India Inc. For the 450 companies that have declared results so far, average net profits grew by an impressive 25% YoY. This despite the fact that input costs have been steadily rising. The last time when India Inc. declared a strong set of numbers was in the fourth quarter of FY10. That was when companies enjoyed high year-on-year growth due to unusually low business sentiments in the quarter ended March 2009.

The healthy performance was not only on the profit front. With respect to revenues, these grew by a healthy 26% YoY (excluding oil & gas companies and banks). Strong domestic demand was the key growth driver as the overseas markets continued to be mired in a recession. Whether such a strong performance will be sustained in the coming quarters is a big question mark though. Input costs are rising and with inflation refusing to ease off, interest rates are also expected to rise. All this is most likely to put pressure on profits. Hence, a few more quarters will give a better picture of how the economic scenario for India Inc. will pan out.

The global auto industry has borne the brunt of the global crisis. But recent figures have shown that the industry is witnessing a turnaround. But their fortunes are driving the growth for another industry as well. We are not referring to automotive ancillaries. We are referring to the IT industry. In-car connectivity demands and technology for interactions has opened up a whole new market for the IT industry. So it does not come as a surprise that the Indian IT industry is targeting this huge market as their next growth driver. Companies like TCS have already partnered with the likes of Ferrari to provide technology solutions to the latter. Infosys is looking at targeting innovation that is focused on providing infotainment within the car. Even within the Indian auto market, the potential for IT is abundant. With this new focus, the Indian IT industry has another driver for growth in its portfolio.

The more we read about the future of China-US relationship, the more we are intrigued by it. One is a rising sun, the other is in dusk. But the future of neither of these global heavyweights is without challenges. The US is partially freezing government expenditure to lower deficit. Although this may bring down their deficit at the end of 5 years by US$ 400 m, it may not materially improve the US' colossal debt problem. China on the other hand is reliant on vending cheap wares to the US to preserve its economic status. So, where or not it likes it, China has little option but to keep lending to the US.

Economist Nouriel Roubini believes that China will keep buying US Treasuries as long as the former remains dependent on exports. If that indeed turns out to be true, the double digit growth rate that China boasts of may help the US more than China. We think that chasing growth rates for the sake of it has not served any economy's long term interests. Nor will it serve China's. As long as India's sustainable GDP growth rate is free of encumbrances, having it in single digits should not be a problem.

Meanwhile, Indian benchmark indices continued with their southbound journey today as well as the Sensex was trading lower by around 110 points at the time of writing. Heavyweights like Infosys and M&M were seen exerting the maximum pressure. Other Asian indices though closed mostly in the positive today while Europe has also opened on a positive note.

 Today's investing mantra
"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." - Warren Buffett

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15 Responses to "Is this the best way to predict a company's future?"


Jan 28, 2011




Jan 27, 2011

Most of the comments here have mentioned about equitymaster research reports and stockselect being based on future earnings - and rightly as mentioned in the article, most of the recommendations by brokerage houses and equitymaster itself fail. While this article is commendable, it would be interesting to see how equitymaster corrects itself to make better predictions in their recommendation reports - they have failed miserably in their performance in last one year. 2009 performance was low base effect when everything went up and 2010 has been nothing to write home about for equitymaster recommendations.


Shivraj Nandi

Jan 27, 2011

In a changed business envorenment, which is forcing many of the promoters to diversify their business model not just becouse of wealth creation but more becouse of hedging their risk from core busines.Hence,it becomes very imperative to look in to the changed model of businees and their competence in genarating revenues. In this context, I do not thing that we can stick to only the past performance of the company for investment. In the contrary, we should always look at the future for forecasting the prospects of the company.


Anupam Garg

Jan 27, 2011

If we do analysis based on past data, we must also take into account the technology and social data of that time. Kodak optical cameras? the company eventually had to shut it down as the arm was running into losses. future evaluation cannot be ignored A company with bleak future prospects despite having good past record is inferior to the vice versa.


Dr. Atul Tiwari

Jan 27, 2011

Of course it is right way but what are those financials to be checked! & how & where one will find the 10 years old track record of a commpany in question is not an easy task. You cant expect a retail small investor to go to company & check records for a shopping of 100 shares. It is thats why people rely on tips of brokerage firms because there is no site providing 10 year old financials of a company & not all small investors are knowledged to trace out small leeway in its business module.
So finally- its good but only possible for Buffets.



Jan 27, 2011


in that case investors would not have made money in Reliance (complete backward integration) or ITC or many other such diversified businesses.

what is a business model is too subjective.


Shanti Kumar

Jan 27, 2011

If the analysts are able to "forcast" correctly, would they not have been Billionaires????? If at all, they have made billions, they have not come forward on any channel, to prove that their forcast was correct and that is how they had made their billions. Yet to come across one!!!


suresh kannan

Jan 27, 2011

Yes i agree that past history is important. Can you add past 10 yrs history to your reports. Atleast research reports.


Amarjit Singh Bajwa

Jan 27, 2011

As i had commented regarding indian investors being befooled by the brokerage companies and theier agents and big fishes in the , three of my beliefs have turned out to be true-i. these people had pridicted for the layman gullible poor naive investors somewhere in the second week of January 2011 that NIFTY 6000 bet which was liquidated today will give them handsome gains-well their investment has evaporated and totally washed off.
ii) The pundits had predicted that investing in TATASTEEL's fpo was a bad idea . Look , how wrong they have been provedin the last couple of days. And shamelessely they are still sssmiling on the TV screens wwithout any remose.
iii) And the last to comment today is thet if these people could predict future theey wwould not be wworking for someone else for not so pridictable salareis themselves.
See you next time.


SS Varadan

Jan 27, 2011

The comments are true, to an extent. I suspect that 'Mark Faber's " Research model might have changed in last 10 years!! " Change is the only Permanent thing": It can be called Adaptability.
In the Modern world, change factors happened in 20 years, 10 years, 5 years, 2 years etc.!
We invest for Future; how can we not ask for projection of Company's Future??
You, as Top Analyst, have to Adapt to best available approach. We put our trust in you, almost!

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