The TCS price fall: Signal or noise? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The TCS price fall: Signal or noise? 

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In this issue:
» Energy sector reforms are here!
» The impact of deregulation on oil firms
» Will increasing power tariffs save gas based power plants?
» Is 'Brand Buffett' under threat?
» ...And more!


00:00
 
Our long term readers will be familiar with the term 'Mr. Market'.The father of Value Investing, Benjamin Graham created this popular metaphor to describe the behavior of markets. On a particular day Mr. Market can be so euphoric that all stocks rise no matter what their fundamentals are. On another day, he becomes so depressed that stocks of even the best firms take a tumble. If you have put hard earned money at stake in the stock markets, you probably know that Mr. Market is very moody and emotional! This is why the stock price of TCS fell about 9% in a day post its 2QFY15 results. Were the results bad? No. But was Mr. Market's expectations over optimistic? Yes! This happens all the time.

Mr. Market shows up at your door every weekday at 9:15 AM with a price quotation for stocks. When you open a business daily or turn on a business channel, you can see the prices that he is offering you. Depending on his mood, the prices will be either attractive or not. The choice of acting or not acting on these prices is yours. So how should you go about dealing with him?

Let us take the example of the buoyant mood that he was in this morning. The BJP has done well in two state elections and the government has finally announced the much awaited reforms in the energy sector. The reforms are certainly positive for the long term prospects of the economy. They will also give a boost to the Megatrends that we have talked about. Mr. Market understood this and was clearly over the moon. So should you join him in celebration? Well, if you want to make a lot of money in the stock markets, our best advice to investors would be to practice detachment from Mr. Market.

You see, no matter what Mr. Market will tell you about stock prices, the reality is that every share represents a part of a business. Most of the time, you really need not worry too much about him. As Graham's disciple Warren Buffet put it; there are only two skills that you need to make money in the markets. One is the ability to value a business and the second is to have the right thought process towards stock prices. The first skill will tell you what a particular business is really worth. The second skill will help you ignore Mr. Market most of the time. The only time you should get interested in his prices, is when he significantly undervalues or overvalues a stock. If he offers you a business for far less than what it is worth, then by all means go ahead and buy the stock. If not, then keep your money firmly in your pocket. We believe that practicing this form of detachment will be a big help to investors. It will prevent the short term noise surrounding a stock from clouding your judgment; as in the TCS example above. In the long term, Mr. Market will always reward good businesses. Your job is to simply invest in these businesses when he is depressed.

How do you deal with the emotional Mr. Market? Let us know your comments or share your views in the Equitymaster Club.

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02:40  Chart of the day
 
'Subsidy politics' has been the hallmark of the UPA government over the past decade. The fuel subsidy alone cost the government and oil producers about Rs 4 trillion during this period, according to oil ministry data, quoted by Livemint. Hence it is only natural that curbing such humungous losses should be the top priority of a government that wants to bring India's deficit under control. The government's latest bold and politically sensitive move to decontrol diesel and raise gas prices has therefore come as a relief to investors. The fall in international crude prices recently, have certainly helped. But the reform move could make a meaningful difference to India's budgetary deficit. The benefits and beneficiaries of this move will be multifold. One, it will encourage private retailers to restart idle fuel pumps. Meanwhile the PSU oil marketing companies will be able to cut down on their losses. More importantly it will attract foreign investment in the energy sector and help India achieve the much needed energy security. State control on fuel pricing has been the reason for failing to attract MNCs like Exxon, Chevron and Royal Dutch Shell to India's oil block auctions since 1999. Since oil exploration is technology and capital intensive, investments by the MNCs could go a long way in securing India's energy requirements. Currently BP Plc, Europe's second biggest oil company and Cairn India are the only two MNCs having presence in India's exploration sector.

Where will crude end up in 2014?


03:00
 
The big ticket energy reforms are here now. The diesel prices have been deregulated. And much awaited gas price hike has been formalized. The move is likely to go a long way in improving fiscal health and strengthening the energy sector. No wonder the stock market has cheered the move with stocks in the energy sector leading the gains. However, not all players will gain from the same. For example, upstream company like ONGC being a major contributor to diesel subsidies and gas producer will benefit from both the moves. However, for other downstream players like HPCL and BPCL, the new rules will redefine the energy markets in a way that may not be in their favor.

Until now, regulated pricing for diesel had kept competition from private players at bay. However, with market pricing to be followed, players like Reliance Industries Ltd, Essar Oil etc will be back in action. Not just private players, even Public firms are like ONGC and MRPL are set to roll out fuel retail outlets in a deregulated pricing scenario. And if existing public OMCs do not brace themselves well for this competition, they may lose market share in the long run.

03:35
 
After focusing on resolving issues in the oil & gas space, the government is now seemingly looking at doing the same in the power space; another big ticket sector which has had negative consequences on the economy in general and the banking sector in particular. The power sector has been marred by a variety of problems, with the key ones being fuel supply concerns, payment delays and execution issues.

However, as reported by the Economic Times, the government is looking at increasing tariffs to allow the stranded gas projects to meet their debt obligations. It is believed that as much as 16 GW of capacity has been stranded; investments worth Rs 640 bn have gone into such projects and thus will be a big relief for the banks as well as the power companies as they get the ball rolling on such investments. While gas supplies will be limited (just enough to cover the obligations), any increments in same will be passed on to the companies in the future. It may however be noted that gas based power plants form a relatively small chunk (high single digit percentage) of the overall power capacity.

04:05
 
Nobody would be interested in listening to the story of a murderer who's turned into a stock picker while still serving jail sentence. However, call him the 'Oracle of San Quentin' and most eyes lit up. Well, this is the effect that brand Buffett has on most people. The moment someone mentions the term Oracle or refers to a person as the Warren Buffett of a certain industry, it is assumed that the person must be extremely wealthy and successful. An article in Bloomberg has highlighted, there's almost a trend where everyone wants to be a Warren Buffett in his or her own narrow universe. So, have a pet horse? You can aspire to become the Warren Buffett of horse feeding and stable cleaning.

See, every writer wants to get the maximum clicks for his headline. And what better name to tempt people into clicking and reading further than give someone the sobriquet of arguably the most successful investor the world has ever seen. Therefore you have right from The Warren Buffett of technology to The Warren Buffett of Energy and to even The Warren Buffett of Pakistan! However, will this mean brand Buffett will soon lose it sheen? We certainly do not think so. Just as his style of investing, brand Buffett is also too wide a moat to get ruffled by repeated assaults. However, as the article highlights, the 84-year-old investor would actually want his personal brand to take a back seat to the Berkshire Hathaway's.

04:40
 
In the meanwhile, the Indian stock markets fell from the day's highs but continued to trade firm in the post noon trading session. At the time of writing, BSE-Sensex was trading higher by 267 points (1.6%). Barring IT stocks, all the sectoral indices were trading in the green. Stocks from oil & gas and capital goods were among the leading gainers. All the Asian stock markets were trading positive led by Japan and Korea. European markets have opened the day on a mixed note.

04:50  Today's investing mantra
"We enjoy the process far more than the proceeds" - Warren Buffett
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3 Responses to "The TCS price fall: Signal or noise?"

V.JEGANATHAN

Oct 20, 2014

I WANT EMOTION IN THE MARKET, SO THAT I AM ABLE TO SELL IN HIGHS AND I AM ABLE TO DO BOTTOM FISHING. EMOTIONS WORKS WHEN WE THINK OPPOSITE SIDE.

Like 

ABHAY DATAR

Oct 20, 2014

Afterall TCS is from the most trusted Tata Group. It has pioneered in opening new doors in the IT sector. Though it has fallen, it will definitely give good returns in the long run. I have bought TCS today.

Like (1)

H K Prakash

Oct 20, 2014

In the early '80s, there was a Tamilian whizkid making a lot of money in the BSE (Shankar?). He had a simple philosphy (and he wrote about it and made speeches, no secret): enter BSE when people are fleeing, and exit ASAP when they are rushing in

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