"Only when the tide goes out do you discover who's been swimming naked" - the famous saying by Warren Buffet has often quoted by value investors to justify there belief in picking good businesses. However, it is getting difficult to prove this point in the US markets. Blame the zero interest rate policies and reckless printing of money. The years of loose monetary policies have penalized quality businesses and boosted the valuations of average and bad companies. No wonder the cautious investors are disappointed.
Low interest rates have left little or no incentives with the managements to cut down debt for companies in US. Irrespective of the business performance, the stock prices are generally going up. And as the era of cheap money is likely to continue, low quality stocks may continue to rule. No wonder, value investors are losing patience.
Unfortunately, the Indian equity markets are not untouched with this flood of cheap money either. A lot of the foreign money has found way into Indian equity markets in search for higher returns. Supported by the foreign money inflow, the valuations for most of the stocks - good, bad or ugly, have gone up, leaving less and less opportunities for value investors. What have further supported the trend are the optimism and reform expectations riding on the new Government. This is despite the fact that there is significant change yet at the ground level.
However, we do not believe that this era of easy money can continue forever. As and when the taps are turned off, the implications will be grave for stock markets around the world, India being no exception. To shield from that risk, it is important that investors look for value proposition in every investment. Ultimately, that will be determined by the earnings growth and cash flows in the long term. And as far as betting on these prospects is concerned, one is better off staying away from the companies with weak balance sheets, bad business fundamentals and no competitive advantage. While it needs a lot of patience and discipline, this is certainly the approach we recommend long term investors to follow.