Oct 18, 2011|
Stocks crashing? To us it looks like 2008 again!
What does 2008 remind you of ? Lehman Brothers collapse. Job losses and salary cuts. Crashing stock markets. Bankruptcy filings and bailouts in the West. Anything else? Well, for us 2008 brought some very interesting opportunities. Ones that reconfirmed our faith in the process of disciplined and long term value investing. In fact 2008 and 2009 gave us stock recommendations that cemented our track record and later rewarded us for keeping away all the noise!
In 2011 we would like to recall what made us different in 2008 and why we see history repeating itself.
You see, a stock price reflects 3 things. The future prospects of the company, performance in recent past and investor sentiments. Most often than not the last two factors cloud investor memory. The long term operating history and future prospects are well forgotten. Here, the stock is most likely to be mispriced and therefore value investing comes in.
In 2008, we found that the country's largest automakers, lowest cost steel producer, biggest bank, largest shipping company and niche pharma majors were all feared to go down under. Their past operating history and long term future potential convinced us otherwise. Moreover the margin of safety in their valuations made every bit of the risk worth taking. In fact talking about valuations, the market mayhem made it possible to recommend some of our favourite companies that seldom look attractive in terms of valuations. In the midcap space too, some of the most promising stories made it for the list of potential ‘multi-baggers'.
However, we were not blinded by valuations. The fact that some companies that had a fantastic run prior to 2008, by not so sound means, may find it difficult to retrace their steps was not lost on us. Hence our Sell recommendations too were not based on the market noise but what our long term investing checklist told us.
Of course, along with the hits we had our share of misses too. But with valuations on our side, the hits far outnumbered the misses over the past 3 years.
Rewinding to 2011, the world is certainly more complex and more intertwined. The concepts of emerging economies being decoupled from the West had became very popular in 2008. However, in 2011, not even an inch of print space was dedicated to the same. That Greece's sovereign default can have rippling effects on global economy is a consensus view. Hence the need to be all the more selective about cheap stocks is pronounced.
Well, that is not to say we start out with the motive of picking out only multibaggers. In fact our growth and profit estimates are far more restrained this time. Nevertheless, the fact that mispriced stocks with sound fundamentals will eventually find their calling in the markets is a belief we firmly adhere to. Hence we advice our readers too to keep out all the noise and retain their belief in a disciplined and long term value investing approach. The results may not be prompt. But rest assured it will make your portfolio all the more secure and wealthy.
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