This is why most value investors fail...

Oct 19, 2011

In this issue:
» Stalled infrastructure projects on the rise
» Will India ever catch up with China?
» PSUs to now line up GDR issues
» Bernanke hints at monetary tightening
» ...and more!
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It is not a case of grapes gone sour! Value stocks that seem to offer loads of comfort in terms of price multiples may not always be the best ones to buy. In fact at times it is best to Sell stocks in your portfolio that have valuations hinging on false prospects. When the same idea was put forth by Jim Chanos, one of the world's most successful short sellers, at the Value Investing Congress, we were all ears. After all, in value investing it is as important to know what not to keep in your portfolio as it is to pick good stocks .

To remind you Chanos has been one of the earliest proponents of China's bust story. Similarly he believes that there are several other themes that value investors should get rid of. Cyclical sectors where the earnings have peaked may seem cheap in terms of earnings multiple. Fads in consumer products and companies that have the threat of being the victims of technological obsolescence most often trap investors at the height of popularity. Entities that have shown lack in corporate governance or management integrity may remain out of investor favour for a very long time until they get their act together. Similarly, companies dependant on a single product or marquis management may fail to retain the halo around them forever. Hence it is best that value investors rid their portfolio of such stocks to make place for better long term bets.

While unlike Chanos we do not believe in short selling, the idea to keep oneself out of the 'value trap' is something that appealed to us. We believe that most value investors fail in their attempt to build a strong portfolio because they almost get married to their favourite stocks. They lose sight of the fact that what was a good value buy 5 to 10 years back may now be unfit for the portfolio. As a result the 'favourite stocks' eventually drag down the portfolio returns.

Do you agree with Jim Chanos' view on themes that value investors should get rid of? Share your views with us or you can also comment on our Facebook page.

 Chart of the day
If one still has any doubt as to why the infrastructure stocks have been taken to the cleaners over the past year, the track record of projects stalled and shelved will suffice to explain. As shown in today's chart, while the value of new infrastructure projects and completed projects have far lagged the stalled projects, the latter has peaked in the September quarter.

Data source: Mint

The fact that of the two continental giants, China is far ahead of India in most matters of social and economic development is as old as the hills now. But how exactly ahead is far ahead? The Economist has made an attempt to answer the question. It has taken a few parameters and highlighted how many years back China had the exact same readings as India has currently on those parameters. For example China's GDP per person was similar to India's current levels almost nine years back. India consumes the same electricity per person today as China consumed around 18 years back. The gap is even more glaring in the field of social progress. More than 33 years have passed since a child in China had the same odds of surviving beyond its fifth birthday as the one existing in India currently! Furthermore, India's adult literacy rate is a mere 63%, the rate which China enjoyed around 25 years back. This is not all. There are quite a few other parameters where the dragon nation has opened up a huge lead over India. Thus, the question that remains answering is whether India would be able to notch up numbers similar to China and that too in the time period highlighted by the data. It is a tall order indeed. Some paradigm change in the way our economy functions would be needed if we are to stand shoulder to shoulder with our neighbour from the north.

It is October already and the Government is still a long way off from achieving its target disinvestment program. The Government had set up a disinvestment program that was expected to mop up nearly Rs 4 bn. However, due to the volatility in the stock markets, most of the public offers of the PSUs were postponed. Now, the government is contemplating a plan to list these companies outside of the country to meet the disinvestment target. It plans to issue GDRs (Global Depository Receipts) or ADRs (American Depository Receipts) on PSUs to mobilize the equity money . It would be an interesting option for sure as it would woo the global institutional investors to invest in the Indian companies. But consider the fact that stock markets in the developed world are currently even more volatile than that in India. As a result, we do wonder if the companies would be able to achieve the valuation multiples that they are hoping for. If they are willing to accept the lower valuation multiples, then why not just list the companies in India itself. It poses lesser regulatory hassles. And also gives the country's investors a way to participate in the offer.

Inspired by the worldwide popularity of Apple's Steve Jobs, the Indian government seems to be making a vain attempt in trying to create the tablet revolution in India . To give you a gist of the story, the government has launched an ultra-cheap tablet called Aakash. By selling it to secondary school students for a miniscule amount of US$ 35 (approximately Rs 1,700), it wants to take cheap computing to the masses. The cost of the tablet is about US$ 46. The government is subsidising the difference of US$ 11. An investment of at least US$ 5 m has already been made.

Now the question is: is this scheme really going to work? For one, cheap things do not necessarily work. Take the case of Tata Nano and the evidence comes pouring. Similar attempts by the government in the past have failures. Moreover, the entire idea that tablets are the technology of the future may be flawed. A very stiff competition comes from mobile phones, the most basic one being available as cheap as US$ 15. To add further, used computers are available at throw-away prices. So there are bleak chances that the government initiative will be a success. At best, it should let the market forces determine the success or the failure of the venture.

One of the main proponents of the subprime crisis and the consequent global financial meltdown has been the loose monetary policies of the US Fed. By keeping interest rates close zero for a quite some time, more and more money found its way into assets so much so that many of them began to be quoted at astronomical prices. Real estate was one such asset which saw all the makings of a bubble being formed. This bubble burst in 2008 and the rest they say is history. And now Bernanke, who has been dealing with US' problems with money printing, opines that central banks may need to resort to monetary policy to combat asset bubbles . However, this comes with a rider notably that this should not be the first line of defense. He believes that central banks should adopt regulation, supervision and monitoring as the first measure to ensure that bubbles are burst at the time they are forming. Bernanke is probably right in claiming that monetary policy alone should not be the only tool to address possible financial imbalances. But that does not mean that one can continue to resort to loose policies for a long period of time given that it plays a part in forming bubbles in the first place.

Despite being a backbone to the trade and commerce and a key determinant of country's economic growth, logistics infrastructure in India seems to be in a state of perennial neglect. As per industry body Assocham, the cost that nation pays for infrastructural inefficiencies surpasses Rs 2 lakh crore. The same is projected to accelerate to about 3.5 times by the end of this decade .

So why are we still lagging in reforms? To begin with, the road industry prefers to go with the conservative estimates of losses incurred that blunt the edge of the issue. This is because it can't afford the solution that lies in training people and usage of modern equipment owing to the poor sector margins, thus leading to a catch 22 situation. Then we have the truckers who overload their vehicles for short term gains, resulting in inefficient fuel and road usage and distorting the economics of road transportation. This trend further leads to higher fuel needs that have become a huge burden on the country's fiscal balances.

It's high time that such problems are fixed. The solution lies in investing in highways, the potential savings from which could result in fuel savings to the extent of Rs 6.7 lakh per km. Such savings will set up an ideal stag for a gradual linking of fuel prices to the international prices. The railways segment should be offered dedicated high-speed corridors and to increase their share in transportation. In the race to become an economic superpower, we can't afford to ignore logistics that can make us make or break us as a country in today's globalized world.

After a robust start, positive cues from Asian markets helped the Indian indices sustain momentum. At the time of writing, the BSE Sensex was trading higher by 247 points. Stocks from the auto, IT and engineering sectors led the pack of gainers. Most other Asian markets are also in the positive while Europe has opened on a mixed note.

 Today's investing mantra
"It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities." - Charles Munger

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6 Responses to "This is why most value investors fail..."

Pradeep Kumar MS

Nov 4, 2011

I am fascinated


T.J.Raghu Veeran

Oct 19, 2011

Timing of selling is as important as timing of buying. When to sell is an art. Stock market is like ocean of milk. When you churn you will get both good as well as bad. But to get Kamadhenu and Karpaga vritcham you have to churn. Similarly you have to churn your portfolio to get blue chips at a reasonable price.



Oct 19, 2011

Every body be carefull they are biggest fraud and kniving with co and sell the stocks to samll investors by their recommendation after that stock tanks 80% of recommendation value.... i have been thier sub for last 2 yrs and not a single stcok have given any positive result even after going thru bull market in 2010 ?????? can u imagine when market was up 80% and following them not get and return. Whatever stock they recommended went down 80% in 2010 it self ?????



Oct 19, 2011

Yes, only those investor who believe in reviewing their portfolios every three to six months alone make wealth from the stocks. There was a time maybe 20 yrs ago, when the mkts were less liqwid and other factors that holding on the stock for 10/20 yrs, was worth it. With todays technology, spread of the mrkt, also now becoming global, importance of FIIs investment as well as withdrawl of funds, one has to be much more alert, quick and aware of "dead wood' in individuals portfolio.

The second point : Catching up with China, well it is going to be next to impossible. We love the freedom provided by democracy, rather than be stiffled by one party autocratic rule prevailing in china. As is our wont, we a re happy with what ever we have achieved in the past 65 yrs of freedom. If only our govt / politicians paid a little more attention to the "aam aadmi" and the popn. actually below BPL, we would be much more satisfied, even if we fail to achieve the progress of China.

The politicians are amassing huze personal wealth sufficient to live a lavish life for their next 3 to5 generations, is all a different matter.

Thanks, Damani


Rajeev Kumar

Oct 19, 2011

Every time you come up with a new idea, and gave us a feeling that no matter what road we choose, a normal investor is going to loose money in stocks. No surprise why most of the Indian investor shy away from investing in stocks.It always seem to be doom, doom and doom.



Oct 19, 2011

If in a time span of 4 - 5 years if the stock remains a value stock only it has failed to serve its purpose.Becuase an investor will earn only if a "value stock " becomes overvalued in 4 - 5 years.

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