|»5 Minute Wrap Up by Equitymaster|
On This Day - 6 DECEMBER 2014
Is it the right time to exit good businesses?
In this issue:
This is a key question that often comes to mind when the markets are booming.
Philip Fisher's take on this topic goes as follows:
My belief stems from some rather fundamental considerations about the nature of the investment process. Companies with truly unusual prospects for appreciation are quite hard to find for there are not too many of them. However, for someone who understands and applies sound fundamentals, I believe that a truly outstanding company can be differentiated from a run-of-the-mill company with perhaps 90 percent precision.
It is vastly more difficult to forecast what a particular stock is going to do in the next six months...For these reasons, I believe that it is hard to be correct in forecasting the short-term movement of stocks more than 60 percent of the time no matter how diligently the skill is cultivated. This may well be too optimistic an estimate.
So, putting it in the simplest mathematical terms, both the odds and the risk/reward considerations favor holding."
Then, on the other side we have individuals such as Mr. Peter Lynch. Mr. Lynch's approach to investing is more to do with sticking with businesses which have a particular story backing them. And as long as they remain intact, it makes sense to hold on. Once they go haywire, the exit route would be one of the key options.
'Buy in doom and sell in boom' would be a good way to sum up his approach...
When comparing these two styles, an aspect that also needs to be considered is redemption needs. While that would have been more so the case with Mr. Lynch as compared to Mr. Buffett, given the former's profession of being a fund manager.
So one key takeaway here would be that while different investing approaches work, it all boils down to an investor knowing himself in terms of his holding capacity, temperament and capital requirements when it comes to investing in - or for that matter exiting - businesses.
In conclusion... know thyself.
As the chart highlights, the gap between HUL's P/E and the Sensex PE has been the highest it has been in recent years. So does this mean HUL's future growth rates to be much better than what it has managed in the recent past? At least this is what the market seems to be implying. And taking a call on this is what it will eventually come down to, we believe. If the stock disappoints in terms of growth over the next few quarters, do expect the gap to reduce. If it doesn't, then the gap should persist we reckon.
It is difficult to say how long the trend will last. As we all know, oil prices in the past have more been a function of speculation and adhoc production controls rather than supply and demand. That said, at current levels, oil prices are likely to render half of the oil production projects unviable. And the resulting lower supplies may lead to a reversal in the oil price decline. Until that happens, consuming countries like India are likely to benefit at the cost of producing nations.
In his recent speech Greenspan explained why only the bubbles that are financed by leverage need to be preempted. For the others his advice is - "Better to clean up the mess after a bubble has burst rather than prevent it!"According to Greenspan bubbles are act of human nature and one cannot really prevent them. Especially when the speculative boom is not financed by debt, like in the case of 1987 stock market crash. Now this brings us to the question, as to what is it that a central bank is supposed to do if not maintain systemic balance in the economy? And at least in the case of Greenspan, he left the dirty job of cleaning up the mess after the bubble burst to his successors. We are glad that the RBI governors are paying no attention.
Among Asian markets, the Chinese market continued to rally, riding high on the central bank's interest rate cut last month and expectations of additional stimulus measures. In fact the index was the biggest gainer (up 9.5%) for the week. The Japanese markets posted robust gains as the weakening yen favored the country's exports. The Indian stock markets remained volatile on mixed signals. While interest rate cuts were once again given a miss by RBI, the passenger car sales registered a robust rise in November. The BSE-Sensex closed lower by 0.8% for the week.
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