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Investing Lessons from Test Cricket

Feb 1, 2016

In this issue:
» Retail investors showing signs of nervousness?
» Weak market sentiments dent IPO market
» ...and more!
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Rahul Shah, Co-Head of Research

I remember...when I was in eighth or ninth standard, my friends in colony often used to play limited over cricket match. It was a tournament of 5 overs, 8 overs, or 10 overs. As we had limited overs to play, we often used to take risks, trying to score as many runs as we could. Our aim was to post decent runs on the board and force the opposite team to chase a big score.

One day, one of my friends decided to start with test cricket format. The rules were simple. Unlimited overs, two innings format, and no restriction on the number of days. Play as long as you can. We were all excited with the new rules. Whoever won the toss, that team would obviously choose to bat first, as batting first in unlimited overs is heaven for any batsman.

So, in one test match, my team won the toss and we decided to bat first. My team captain told me to open the innings with another friend. We were excited to start the inning. Before going for batting, the captain told me, 'Look, this is test match. You don't have to score on every ball. Try to settle down first, wait for bad deliveries and then score.' It was a good advice indeed.

I stood at the non-strikers end watching my friend batting at the other end. It was a treat to watch him play. He was playing like Rahul Dravid - defending every ball, ducking bouncers, and patiently waiting for loose balls. He would score a boundary every time he got a loose ball. He said during the break, 'Look, when you play with discipline, you will get opportunities like low full-toss ball, and that is when you score runs.'

I was lucky to play alongside him. We posted a big total on the board and won that match by a big margin.

Why am I reminiscing about my childhood cricket days? Consider this: Mr Market is like a bowler who continuously throws ball after ball to you. Sometimes, he throws a very tempting ball and forces you to play (or in other words, take action for buying or selling of shares). Sometimes, this bowler goes crazy and throws bouncers and beamers trying to hurt you.

Now, at the other end, you are standing and trying to respond to this crazy bowler. You can defend, try to score runs, hit four or six, or even get out. Make no mistake; this crazy bowler is very smart and knows your weakness.

He knows that you are likely to play on a tempting ball (or temping investments with great growth prospects, attractive valuations, high profitability, etc).

It is very difficult not to play this ball as you see a chance to hit a boundary. But remember...he is a smart bowler. It could be a trap.

So how can you stand in front of him and score a century and plenty of runs?

Discipline.

Discipline comes from practice, experience, and learning from your mistakes.

Charlie Munger once said, 'I like people admitting they were complete stupid horses' asses. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.'

So you must learn from your mistakes...and vicariously through the blunders of others.

Success has much to teach investors. But learning from failure as well will help avoid folly in the first place.

But discipline is not enough. Investors also need patience. As Warren Buffet once said, 'No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant.'

My colleague, Radhika exactly does the same while selecting a stock in Value Pro Portfolio. She rigorously follows stringent qualitative and quantitative investment criteria as practiced by Warren Buffett. And irrespective of how Mr Market behaves day in and day out, she keeps her eyes trained on the intrinsic value of the stocks.

Remember...You are batting and Mr Market is bowling. He'll tempt you with stock quote after stock quote, but it is your job to wait for that low-full toss ball and score a boundary. That's how you score a century and plenty of runs in long term.

What investing lessons you can take from the world of sports? Let us know your comments or share your views in the Equitymaster Club.

2:30 Chart of the day

These are uncertain times... Not just for the economy, but for markets as well. Earnings have been below expectations. Since the start of the year, Sensex has shed around 16%. From acche din, talks have swivelled to possibility of a bear market.

If FII inflows are anything to go by, Indian markets have faced their worst in the month of January 2016 since 2008 - the year known for global financial crisis. FIIs have offloaded shares worth Rs 111 billion in January alone.

Even retail investors, who were standing their ground until now, seem to be having their doubts.

As per an article in Business Standard and AMFI data, net equity inflows in the equity segment of mutual funds have hit 19-month low. As redemptions rule, net inflows in the month of December were down 43% month on month.

So what does all this mean for you?

Should you take the cue and stay away from the markets? Or use this correction and pessimism as an opportunity to buy solid businesses as reasonable valuations?

We believe it's time to focus on the silver lining in the dark clouds. Last year, high expectations sent the valuations soaring, far beyond the fundamentals. Now that reality seems to be setting in, it could be a good opportunity for long term investors to place bets on businesses with strong fundamentals.

Are Retail Investors Getting Nervous?

3:30

Last year, the Initial Public Offering (IPO) market was abuzz post the recovery in the local equity market. However, in 2016, companies that were planning IPOs want to wait due to uncertainty caused by recent volatility.

Companies such as L&T Infotech, India's ecommerce company - Infibeam, Parag Milk Products, Amar Ujala Publications and Catholic Syrian Bank, which have received approvals from SEBI for share sales, may postpone IPO plans for more opportune time. From oversubscription to doubts about an IPO sailing through, sentiments have taken a reverse turn. Those who were making a beeline for IPOs are now preferring to stay on the sidelines.

Companies normally try to come up with an IPO when market is bullish and sell shares at premium valuations as they try to sell their 'growth story', which the investor community likes to listen. During such times, investors forget basics of investing, which are valuations and fundamentals.

And here is what Warren Buffett has to say about IPOs. He believes that IPOs are almost always bad investments. There is so much hype involved that IPOs won't be the most-attractive value proposition. Investors should look for good businesses to buy and try to determine how those companies will fare in the next 5 to 10 years.

4:00

After opening the day in the green, the Indian stock markets witnessed a choppy trading session and are presently trading near the dotted line. At the time of writing, the BSE-Sensex was trading higher by about 23 points (up 0.1%), while the NSE Nifty is trading up by 10 points up (0.1%). Sectoral indices are trading on a mixed note with stocks from the telecom and capital goods sectors leading the gains. Banking stocks are, however, trading in the red.

4:30 Today's Investing mantra

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst) and Richa Agarwal (Research Analyst).

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