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While Dalal Street is Busy Cutting its Earnings Estimates, Why We Are Busy Doing Nothing - Views on News from Equitymaster
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  • Jan 5, 2017 - While Dalal Street is Busy Cutting its Earnings Estimates, Why We Are Busy Doing Nothing

While Dalal Street is Busy Cutting its Earnings Estimates, Why We Are Busy Doing Nothing
Jan 5, 2017

There's been frenetic activity on Dalal Street these days.

Its analysts have been very busy rethinking their 'guesstimates' of companies' earnings. Demonetisation has pulled the rug from under the elaborate and intricately constructed excel sheets they use to come up with such short-term earnings projections.

Here, have a look at their cuts in earnings of companies from a few sectors over just the last two months:


Note: this was after more than half of FY17 was already over. Thus their actual cuts in estimates for the rest of FY17 would have been significantly steeper.

But this rethinking and recalculating in nothing new to them. Every now and then something comes along in the business world that completely shakes the applecart and throws all short term earnings projections out the window. That's just the nature of the beast.

And then it happens all over again.

Which begs some inconvenient questions: Does it even make sense to try and make such precise earnings projections? And then actually use these projections to make investing decisions? Aren't they a little too unreliable?

What Graham felt

Here's Graham's take on financial analysts and this forecasting game they like to play:

  • They tend to take the market and themselves too seriously. They spend a large part of their time trying, valiantly and ineffectively, to do things they can't do well. To forecast short- or long-term changes in the economy, and in the price level of common stocks, to select the most promising industry groups and individual issues - generally for the near-term future.

So what would be a better line of activity to pursue while making investing decision?

Here's Graham again:

  • Essentially, a highly simplified one that applies a single criteria or perhaps two criteria to the price to assure that full value is present and that relies for its results on the performance of the portfolio as a whole - i.e., on the group results - rather than on the expectations for individual issues.

    At bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public.

Those words of Graham continue to remain one of the central themes of what we do at Microcap Millionaires. We select neglected companies that have nothing fundamentally wrong with them. And then apply simple and objective criteria to the price of their stocks to assure ourselves that we are getting much more than our money's worth while buying them. In that way, even if a few disappoint, we still make a killing on the group of stocks as a whole.

And that is how we go about our business of exploiting the recurrent excessive optimism and excessive pessimism of the speculative public.

Dalal Street can continue to play its forecasting games. It only makes the peaks higher and the troughs lower. It only makes things more interesting - for us.

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