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Share Price or Share Value?

Nov 15, 2016

In this issue:
» India's Cash to GDP Ratio High Compared to Other Nations
» Could a Parallel Black Economy emerge?
» ...and more!
00:00
Kunal Thanvi, Research analyst

I am a typical Marwari. Cost conscious by nature. Friends always talk about how I try to save money. That's fun for them, but this has worked well for me.

Last month, I was with some real estate agents. I was looking for an apartment to rent.

These agents are very shrewd. They know how to bargain and negotiate.

The last apartment was good. My reactions told the agent that I liked it.

When I asked about the rent, he straightaway gave a number well above the market rate. I tried to negotiate but failed to convince him.

On my return home, I realised the agent was throwing an anchor at me...

Gurus of behavioral finance talk about 'anchoring bias'.

Anchoring bias occurs when we rely too heavily on a preliminary piece of information to make decisions.

Let us consider two simple questions:

Q1: What was the age of Mahatma Gandhi when he died? Was he older than 104 years?

Now, what do you think? One thing is sure: Your guess will probably be somewhere around 104 years.

Q2: What was the age of Mahatma Gandhi when he died? Was he older than 45 years?

If you hadn't had the background of first question, this time your guess would likely be closer to 45 years.

The numbers 104 and 45 are acting like anchors. Our mind looks for answers around these anchors.

Mahatma Gandhi was 78 when he died.

...

This is the tactic the real estate agents play. They start the negotiation from an absurdly high number. And even if we feel the price we negotiate is low, it is not the case. Our subconscious mind is anchored to the higher number and we ignore the true value.

The stock markets throw various anchors.

They tend to be based on certain reference points.

For instance, we anchor stock prices to their 52-week highs and lows as well as their lifetime highs and lows. But a stock trading at its 52-week high or low does not necessarily mean it is the price to act.

Remember, a 100-bagger will give ten opportunities to make one 10-bagger.

It is the underlying business economics and the growth opportunities that discover the business value. In the long turn, the stock prices represent the business's value.

We are in the middle of a bull run. Many stocks are witnessing lifetime highs. The high prices can be seen as anchors.

More than 60% of BSE 500 Index companies are either at a 52-week high or 0-15% discount to it.

Discount from 52W High No. of Companies % of Total
Upto 10% 202 40%
11%-15% 110 22%
16%-20% 54 11%
21% & above 74 15%
Others* 60 12%

Source: Ace equity
*Suspended or not trading

How one should interpret this data?

Does this mean only 30% of the BSE 500 is investible?

No, we don't look at it that way. We look for value rather than price.

A company trading at 52-week highs might be at discount to its intrinsic value. In fact, a company trading at 52-week lows might be commanding a premium over its intrinsic value.

Similarly, I got the apartment 10% below the market rate. This is what a Marwari will love.

The Hidden Treasure team is well aware of anchoring bias. They've ignored the anchors before and were rewarded well.

Richa and her Hidden Treasure team recently revealed their three highest conviction stock picks in a unique report called Junior Blue Chips. Junior blue chips are small caps with five crucial properties that remind us of blue chips. The team believes these three stocks will do well no matter what anchors the market throws.

03:45 Chart of the Day

In the premium edition of The 5 Minute WrapUp on 11 November, Rahul Shah wrote about the reasons why India is a cash based economy. Trust in online payments, security risks, identity and privacy issues, as well as old habits of paying in cash, are just some of things that he mentioned.

The bottomline is that it'll take a long time for India to even come close to a cashless economy. Many nations are way ahead of us. As today chart shows, India trails many developing as well as developed economies (except Japan) when it comes to the use of cash. While some of it will surely be black money, India's informal economy is a vital cog in economic growth.

India Remains a Cash Based Economy


As per an article on Livemint, the Indian economy's dependence on cash could worsen. Low balances in most Jan Dhan Yojana accounts point to the fact that people in rural India have not got in to the habit of depositing their hard-earned cash savings in banks. Sadly, they are likely to bear the brunt of the demonetisation drive.

04:30

The demonetisation drive has seen its fair share of problems. Long queues at ATMs for withdrawing a handful of Rs 100 notes is now a common sight across the country. It is now clear that the banking system was unprepared for the implementation of the scheme.

With footfalls in markets having fallen drastically and several cash based industries facing severe stress, political parties have asked the government to ensure orderly transition. With Parliament reconvening tomorrow, the government will come under severe criticism.

Worryingly, some people are adjusting to this via a parallel black economy. As per an article in the Business Standard, many small businesses have already started accepting old currency notes of Rs 500 and Rs 1,000. These are being deposited in savings accounts instead of the current account of the respective business. This to accommodate transactions up to a couple of days of business.

If such trends were to continue, non-legal tenders may also become acceptable with a lower value. Money functions as a medium of exchange and as a store of value. So if people continue to exchange the old notes, with the faith that it will be accepted in the black economy, then there is a chance that it may become a permanent feature.

We believe, such dealings should never be allowed to emerge. The best way to prevent it, is to ensure a smooth transition to the new currency notes. Unfortunately, there is likely to be a few weeks' delay, at best, in this regard.

04:45

After opening the day weak, the Indian stock markets remained below the dotted line. At the time of writing, the BSE-Sensex was trading lower by about 400 points (down 1.5%), while the NSE Nifty was trading lower by 150 points (down 1.8%). Most sectoral indices were trading lower with realty stocks leading the losers.

04:55 Today's Investing Mantra

"We always look at them as businesses, whether we're buying the whole thing or 100 shares." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Kunal Thanvi (Research Analyst).

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