Free Reports

'Ferrari Ki Sawari' and the Unfortunate Habit of Selling Too Early

May 29, 2017

In this issue:
» Indian Auto has created great wealth for shareholders
» Perception of risk vs actual risk in today's markets
» ...and more
00:00
Rahul Shah, Co-Head of Research

Have you ever sold a good quality stock only to see it go substantially higher? As value investors, I am sure we all have. Heart-wrenching, isn't it?

Even the most successful investors are guilty of this. Mohnish Pabrai is perhaps the latest example.

(Pabrai is one of the super investors we track, but unfortunately, Rohan and Kunal weren't able to interview him for their super investor project. We hope that will change soon!)

Mr Pabrai rues the day he sold his stake in Ferrari.

Pabrai, who received Ferrari shares courtesy of its spinoff from parent company Fiat, promptly sold his stake once the stock achieved what he believed was 90% of its fair value.

And now he's kicking himself. Pabrai:

  • Ferrari is a unique asset. It is one of the widest moat businesses on the planet. The cars appreciate after they are sold. Incremental margins on their higher-end cars likely exceed 70%. More importantly, Ferrari is led by Sergio Marchionne, who is simply one of the best CEOs on the planet. May god give me the wisdom to not sell another share of Fiat Chrysler or Ferrari as long as Sergio runs them. Ferrari is an incredible asset, and when it is managed by one of the top 100 all-time greatest CEOs to come along, it is pure stupidity to sell.

Now, while Pabrai did invest the proceeds in another companies, and while they have done well, Ferrari has done better and has a much wider moat.

This is a typical error of cheapskate value investors. They tend to overvalue undervaluation and undervalue business quality. Pabrai happily tucked into a low PE but a narrow moat business and gave up a slightly more expensive business that had a huge moat.

Ferrari has doubled since its spin off with Fiat. And to make matters worse, in a few years' time, its world-class CEO is capable of making the current stock price look like a bargain.

I am not saying we've been any better at avoiding this error.

Hidden Treasure, for example, our small-cap recommendation service, has had its own Ferrari moments. But we learn and try not to repeat them - hard as that can be.

Unless a good quality stock is egregiously overvalued, we recommend investors hold and not rush to book profits.

Page Industries is the obvious example here. Even though it's nearly a 50-bagger from our recommendation price, it still has pride of a place in the service.

But even with this example looming large over the Hidden Treasure team, they recently had an intense debate about another good quality stock that has moved up a lot but is in no way egregiously overpriced.

Thankfully, better sense prevailed and we kept the position open.

Good quality stocks don't always trade cheap. But when they do, and once you get your hands on one, don't be in a hurry to sell until it's egregiously overvalued or there is a clear deterioration of the business.

After all, why would you ever give up a Ferrari?

--- Advertisement ---
EXCLUSIVELY Published For Our Readers...Claim Your Copy Today!

You will never find this in a bookstore...

Nor will it be available on Amazon...or anywhere else.

Our Latest Special Guide has been published EXLCUSIVELY for our readers and it can ONLY be claimed through this invitation.

It is a must-read guide that reveals the secret investing strategies of India's Super Investors.

And today, you can get instant access to an Absolutely Free Downloadable Copy.

Click Here To Download Your Free Guide (Worth Rs 950) More than 20,000 readers have already downloaded their copies...Hurry
------------------------------

03:00 Chart of the day

Ferrari has a deep moat alright, but what about Indian auto companies? Do they have a moat? More importantly, have they created wealth for shareholders over the last 10 years? If today's chart of the day is any indication, they certainly have. As the chart highlights, most of the big auto manufacturers in India have beaten the benchmark index by a substantial margin over the last 10 years. The biggest gainer by far has been India's largest car manufacturer Maruti. At 24% CAGR, the stock the outperformed the returns generated by the Sensex by a factor of 3x.

Indian auto manufacturers have not only benefited from the long term structural India growth story, the returns have also been a function of the market share these players enjoy in their respective segments.

Almost all the companies are either number one or number two in the respective markets and have a share much higher than the next competitor on the list. This has given them the requisite economies of scale and reach, parameters that are extremely crucial to earning profits and creating wealth over the long term.

Has Indian Auto Created Wealth for Shareholders?


04:00

While Pabrai is ruing selling his Ferrari, Seth Klarman, another noted value investor is warning investors of the big risks that lie ahead. He is of the view that investors are misperceiving risks in the markets at a time when the markets are hitting historic highs.

Comparing the current situation to the 2008 financial crisis, Klarman goes on to add that while the perception of risk was very high in 2008, actual risk was much lower because the markets were attractively priced from a long-term perspective. In contrast, the perception of risk is quite low in the current markets but the actual risk is quite high because stocks are trading at record highs.

He couldn't be more right in our view. Even in India, although the benchmark indices have hit record highs and people are cheering, the actual risk has gone up because of the steep valuations that the benchmark indices are trading it. At current levels, the Sensex trades at a trailing twelve-month price to earnings ratio of close to 23x.

This is much higher than the long-term average of 18x. Having said that, the risks may not be as high as the US stock markets because of the high growth rates in our economy and also the possibility of improvement in profit margins of Indian firms. Still, investors would do well to look at stocks on an individual basis and be wary of paying very rich valuations.

04:45

Indian stocks are trading mixed today as while the Sensex is marginally higher, BSE Mid Cap and Small Cap indices are out of favor and trading weak currently. While Sensex is up 50 points, Mid and Small Cap indices are down 0.7% and 0.9% respectively. Amongst sectoral indices, FMCG and consumer durables are bucking the trend and trading strong currently.

04:55 Investment mantra of the day

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffett

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

Today's Premium Edition.

Page Industries: The Expensive Market Darling and Why We Still Own It

A disciplined approach to gauge the attractiveness for a fast growing but high valued stock.
Read On...Get Access

Recent Articles

This Rs 71 Trillion Business Could Make or Break (Your) Wealth in the Next Decade October 17, 2017
How to profit from behavioral biases afflicting the industry.
Sometimes the Market Makes Me A Crazy Person October 14, 2017
It's necessary to guard yourself when euphoria surrounds the market.
A Grave Mistake Both Companies and Investors Make October 12, 2017
When a company is making acquisitions or an investor is buying shares, this one important factor cannot be ignored.
Timeless Stocks on the Electric Car Assembly Line October 10, 2017
Are they on their way to create Coca Cola-like wealth?

Equitymaster requests your view! Post a comment on "'Ferrari Ki Sawari' and the Unfortunate Habit of Selling Too Early". Click here!

  
DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.