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Should Start Up India Lure You?

Jan 11, 2016

In this issue:
» Retail investors lost heavily in these bluechips...
» Some updates from our StockSelect team...
» ...and more!
00.00
Bhavita Nagrani, Research analyst

I often see a sales guy on the train during my morning commute to the office. He sells varied accessories and apparels. He's usually negotiating with the people, always coming up with different proposals and telling people 'stories' about how often his inventory gets sold off, how his new designs are in demand, have long-term durability, and so on.

Some people get carried away by his fawning and buy, some bargain, and others reject the offer. Recently, I saw this guy negotiating with a group over a product...and telling those stories. He finally closed the deal. This time he even got other passengers to buy just because their fellow passengers were buying, even though it did not suit their needs.

As I pondered this, it brought to mind one of Benjamin Graham's favourite metaphors: 'Mr Market'. I began to associate the sales man with Mr Market.

What does Mr Market exactly do?

Graham's Mr Market is a fellow who approaches people every day with an offer to buy shares. The price Mr Market quotes might seem feasible sometimes, but it is usually unreasonable.

Investors are free to agree or disagree on the price. Some show strong reluctance to Mr Market's high prices. But Mr Market doesn't mind. He always comes back the next day with a fresh offer. Sometimes he comes with a story about a given stock, a story designed to lure investors. Some will buy based on the bit of information Mr Market provides about the companies. Remember the sales man whose stories lure buyers...

These stocks are termed 'Story Stocks' and we would call this act as fascination for buying the trendy ones. That too, irrespective of their price. Mr Market often uses this trick to tempt investors.

Similar news has been hitting the headlines these days - for example, the government's initiative, Start Up India. The program aims to promote financing for start-ups and offer incentives to boost entrepreneurship and job creation.

Make no mistake; we are not against these developments. But there are reasons for investors to be cautious as these start-ups get listed. They must do their homework to ensure that they aren't lured by stories and projections of robust earnings growth. Once again, the business model will have to be studied and businesses that are looking at bigger valuations should be avoided.

While it may offer decent upside for existing big players, it could be a potential trap as far as investors are concerned. No wonder the big investors fund these start-ups, hoping to get some large returns when payback time (IPO) comes.

Many investors are taken in by such story stocks, often without checking the facts and investment utility. Such compulsive shopping could be a risky game. As a prudent investor, you should not let Mr Market's daily communications determine your view on a stock or affect your decision to buy. Else you may invest for all the wrong reasons and end up with junk.

How many times have you been buttonholed by Mr Market's tricks? Let us know your comments or share your views in the Equitymaster Club.


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2:30 Chart of the day

2015 was a disappointing year for investors in India. After hitting the 30,000 mark in March 2015, the BSE-Sensex has been on a downward trend and is currently hovering close to its 52-week low.

Today's chart of the day shows the quantum of wealth lost by retail investors in some well-known bluechips between August and December 2015.

As you can see, engineering giant Larsen & Toubro (L&T) tops the list of losers. As per data reported by The Economic Times, L&T's market capitalisation plunged by about Rs 477 billion between August and December 2015! Based on the retail shareholding levels, retail investors have lost wealth to the tune of about Rs 96 billion. That's indeed massive.

Top 5 Bluechip Losers for Retail Investors

Does this data scare you? Do you regret investing in blue-chip stocks in 2015? In our view, it would be a big mistake if this fear prompts you to dump stocks and to bid a bitter farewell to the stock markets.

Sure, there are reasons to worry about the Indian and global economy. There are risks...there is volatility...there is uncertainty. But when has this not been the case? Consider the famous words of the legendary value investor Warren Buffett:

  • 'In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.'

We understand it is tough to see your stock prices going down. But that's the bitter truth about investing. If you want to be a successful investor, you have to change the way you perceive stock price movements and how think about risks.

For a long-term value investor, pessimism and lower stock prices ring the bells of opportunity. We are certainly not saying that if a blue-chip stock is trading at a 52-week low, it is a lucrative bargain.

We do not judge the attractiveness of a stock on the basis of the stock price. We focus on value. We focus on valuations in relation with business fundamentals and future growth prospects.

Just a few days ago, Tanushree Banerjee, our Co-Head of Research and also the Manging Editor of StockSelect - our large-cap stock research service - put up a special note titled 'Sensex Down to 52 Week Low Valuations. Time To Buy Bluechips?' (subscription required).

We would also like to share with you that our StockSelect team has identified a couple of value buying opportunities and is planning to publish them soon. Do watch out our StockSelect section for the updates.

Do make sure that almost 60% of your portfolio is fortified with such safe bluechips. These are the stocks that not just help protect your downside risks, but will also be the key catalysts in your wealth building journey. Also, gentle reminder that no stock should form more than 5-6% of your overall portfolio.

4:00

The Indian stock markets are trading on a weak note since the start of the trading session. At the time of writing, the BSE-Sensex was trading lower by about 153 points (-0.61%), while the NSE-Nifty is trading lower by about 54 points (-0.71). Most sectoral indices are trading on a negative note with metal, capital goods and IT stocks leading the losses. However, auto and energy indices were trading in the green. The S&P BSE Midcap and S&P BSE Smallcap indices are also trading lower by about 0.86% and 0.64% respectively.

4:30 Today's Investing mantra

"After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers."- Warren Buffett

This edition of The 5 Minute WrapUp is authored by Bhavita Nagrani (Research Analyst) and Ankit Shah (Research Analyst).

Today's Premium Edition.

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Many stocks in financial distress have surged during 2015. Should you invest in these stocks?
Read On...Get Access

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Equitymaster requests your view! Post a comment on "Should Start Up India Lure You?". Click here!

1 Responses to "Should Start Up India Lure You?"

AKANSHA

Jan 12, 2016

Nice read. good warning. Hope your Mr Market also follows this advice for the non start ups. Crying over SAIL still !! :(

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Equitymaster requests your view! Post a comment on "Should Start Up India Lure You?". Click here!
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