How to take advantage of the Biggest growth story of 21st century- Indian economy?

 In my earlier blog, I had talked about Indian economy being the biggest growth story of the 21st century. This is based on how the most reliable global institutions and global banks are forecasting Indian economy to power ahead of US and China economy by 2050(pl refer to the earlier blog on 25th June). As mentioned earlier, Indian economy would grow 4 times by 2020(in a decade),14 times by 2030(20 years) and 20 times by 2040(30 years) and so on. Potentially,you could grow your wealth by same or better muliples by investing in NIFTY/sensex Index based funds.However,if we want to do better than these multiples,we have to do some homework in stock picking.

Remember, dont invest in stocks as peices of paper , invest in businesses underlying them .The key is to identify the sectors and businesses/ companies who are the best proxies of this future Indian economy growth  for decades. Remember that this is a long term story and hence we have to pick the best businesses which has the best chances to grow & survive with Indian economy for atleast 10-20 years.

 Lets identify great businesses with following five criteria :-

- Proxy to the Indian economy growth story or strong co-relation with Indian economy growth

- Excellent long term growth potential and durable competitive advantage ("sustainable economic moat"  as Warren would call it)

- Honest and competent management - transparent and shareholder friendly
- Strong financial track record -stable & high profitability/ROE with low debt

- Available at attractive or atleast fair prices with good "margin of safety"

These would be my "Hi-Five" principles/ framework of value investing in Indian markets. I would like to quote one example to demonstrate how to deploy this framework/principles

PFC(Power Finance Corporation) - Why PFC?

- Power is the biggest "theme" aligned to Indian growth story
- Power needs investments of $400 Billion in next 6 years(12th Five year plan).
- PFC is best suited to service this huge requirement of funding, given its expertize & domain knowledge
- PFC plays a strategic role in all big govt. power development schemes. For example , its the nodal agency for all UMPP(Ultra Mega Power Projects) - each of  4000MW size & $4 Billion of investment.
- New sanctioned loans pipeline is $40 Billion - twice its current loan book size of about $20 Billion .This ensures great revenue growth visibility for next 3-4 years
- Last 5 years business and financial track record has been fantastic with 22% growth in sales, 15% growth in EPS/earnings and 16% ROE with NPA at 0.03%  .
-  The current P/E is just at 8.5 due to concerns on slow loan growth(due to power projects execution delays and clearance delays) and SEB(state electricity Boards) health. The fears are exaggerated due to heavy pipeline of already sanctioned loans and very low NPAs.(Non performing assets)
- Bottomline is that it satisfies all the Hi-Five criteria and hence is a strong bet.

You could invest in this scrip now(trading at < Rs.200) with a time horizon of  atleast 3-5 years with a target annualized returns of 15-25% over long term, provided there is no terrible market shock. Its a safe and risk free bet with excellent return prospects.

You have to find another such 8-10 companies/ businesses which can land you in a gold mine in next 10 or more years, available at attractive or atleast fair valuation . I have talked about another 2 companies in my yesterday's blog (9th July)- LIC Housing Finace and Bank of Baroda(pl refer to it). Don't overdiversify by investing in more than 10-12 companies/ stocks if you want to beat the average market returns.

Remember , Successful equity investment is not a rocket science . It doesn't require a high IQ or professional expertise. All its requires is the right temperament(long term investing) , sound and common sense driven framework or  principles to select the right businesses available at right valuations & finally discipline/patience to stick with your decisions, regardless of the short term variations of the market.

Happy stock picking and investing.

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Value Investing - The art of taking advantage of market inefficiencies (with few examples)

 In my earlier blog,I have talked about markets not being so efficient in pricing the intrinsic value(true value) of the businesses/ companies, especially from a long term perspective . Value investing is all about taking advantage of these efficency gaps, whenever they present themselves to us . Lets now talk about why markets are not so efficient many times...

Price volatility in the market is driven by multiple forces:-

1) Fundamentals volatility - Change in information regarding fundamentals of the business or company lead to change in prices
2) Sentimental volatility - Sentiments such as greed and fear play a big role leading to herd mentality among market participants
3) Momentum/ Liquidity volatility - Changes in momentum and liquidity driven by factors like hot FII funds, hedge funds,RBI monetary actions, US Fed actions etc
4) Trader volatility -  Gambling and speculation instincts of traders along with future/options trading lead to more volatility of prices
5) Macro-economic news - Noises/ forecasts  on inflation, interest rate changes, GDP output etc lead to changes in market prices

Markets would have been 100% efficient in capturing intrinsic/true value if the stock prices would been driven by the first force only(fundamentals volatility). However , due to so many complex and muliple forces , markets often become not so efficient in pricing the true value/ instrinsic value of the companies.

One of the big root causes behind these multiple forces which impact market prices is the fact that 90-95% of the market participants(including retail investors, mutual funds, hedge funds, FII etc) are very short term oriented who try to make a fast buck out of every news or event. Big mutual funds and other institutions are in the rat race of beating the competition every month and quarter and hence pay only lip service to tenets of  long term investing or value investing.This short term orientation of market participants make the markets very short sighted and over-reactive to short term  events.

Warren buffet discovered that because 95% of all participants try to beat each other out of the quick buck, markets are very efficient in the short term and hence its impossible to beat the market consistently from a short term perspective. However because of the same short term orientation, markets are not very efficient from a long term perspective - sometimes grossly inefficent. Thats why Benjaman Graham also used to call Market as "manic depressive" who is either too happy or depressed due to short sightedness and over-reactiveness.

Hence the only way to beat the markets consistently is through long term value investing(atleast 3-5 years investing duration or more)so that you can exploit the shortsightedness & long term inefficiencies of the market.

Show me a guy who became a billionare only through short term trading and speculating . But there are many many examples of billionares through long term  value investing - from  people like Warren, Graham, John Templeton to our own Rakesh Jhunjhunwala.

Let me quote some examples of great companies or stocks  in India where market has shown inefficiencies providing mouth watering opportunities  to investors like us to make a killing.

Warren calls such opportunities as " bad news phenomenon" . You basically identify great businesses/ companies and wait for a temporary bad news event either with the specific company or with the specific industry or sector in general.The market over-reacts because of its shortsightedness  as if there is no tomorrow and slams the stock or stocks badly,providing us with glaring opportunities to make money.

Example 1: LIC Housing Finance - This is one of the best examples of the recent past. The company was running at the levels of Rs 270-280 sometime back, when the "cash for loan" scandal hit some of the financial companies including it(CEO got arrested) . Investors over-reacted and hammered the price to 140-150 within few days. Fact of the matter was that the impacted loans was just Rs 1000 cr out of a loan book size of Rs 40,000 cr(2.5%) and those loans too were not bad loans as they had been extended to blue chip companies. Secondly , the event was a temporary blip which could not permanently impact the business of a robust company and brand like LIC. I went ahead and bought tons of the stock with all the cash I had . Today the stock is back at levels of 230-240 within 6-7 months(50% returns ). Even today, the stock could be bought with a horizon of 3-5 years,as its at P/E of 10-11 with a ROE(Return on equity) & earnings growth rate of >20%.Over long term, it should give annualized returns of 15-25%, provided there is no terrible market shock.

Example 2: Bank of Baroda - This bank has been awarded and rated as the Best bank and Best PSU bank many times including 2010. In 2010 , its business grew by 27-28% . Its ROE is at 22%  and net NPA is <0.5%(one of the best financial performance among banks) . Its vision and outlook has been very progressive in terms of substantial investments in HR capabilities, IT and customer service excellence.Yet , its valued at 8-9 P/E , just because markets over-reacted and painted it with the same brush as the entire banking industry because of rising inflation and interest rates.Over long term(atleast  3-5 years or more) should give annualized returns of 15-25%, provided there is no terrible market shock.

Will provide more examples of such Indian stocks soon where we can exploit market's shortsightedness to buy at a substantial " margin of safety" to the intrinsic/ true value of the stocks and then wait for markets to value them correctly. Markets get the valuation right in the long run.

Happy reading

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Biggest growth story of the 21st century - Indian economy

Warren Buffet once said that he owes his remarkable sucess to a luck factor as he was born at the right place(USA) at the right time. The stupendous growth of US economy after world war II for the next 60 years was the biggest growth story of 20th century. Warren and lot of other legendary investors like Benjamin Graham, Philip Fisher, John Templeton were born at the right time in US and rode the US economy growth to create their wealth in billions of dollars.

We , Indians are staring at the same kind of opportunity to create huge wealth by riding the biggest growth story of the 21st century-Indian economy.

Do you know that India is predicted to become the largest economy by 2050? Source: Citibank report and US Govt. report(Robert Blake , Astt secretary of state, US)

Do you know that India is well on its way to surpass US economy by 2042? Source: Goldman Sachs BRIC report. My projections are forcasting that we will surpass by 2035(next 25 years)

Do you know that India would be a $5 Trillion economy by 2020- probably the 3rd largest after overtaking Japan? This is 4 times the current size($1.4 Trillion) in one decade(10 years) Source: Standard Chartered report

Do you know that India would be $20 Trillion economy by 2030? This is about 14 times more than current size in 20 years. This will be about 1.5 times the current size of US economy. Source : Standard Chartered report

Do you know that in 2010 , Indian economy surpassed China to become the fastest growing economy in the world ? Yes, the nominal growth of the Indian economy(in actual Dollar terms) was at 20% , highest in the world. However the real GDP growth was at about 9%(after subtracting inflation rate at 11% from the nominal GDP growth). China's real GDP growth(after subtracting inflation) was at about 10%  as their inflation was much lower at 5-6%

So , keep your seat belts tight while riding this Indian Tiger(economy). If you  wisely ride this stupendous growth opportunity for the next 40 years by investing in the right stocks/businesses and assets , you could create huge wealth for yourself and your coming generations? However, if you casually and unwisely ride by taking undue risks and by being too greedy and impatient ,you are doomed to miss this once in a lifetime opportunity. Remember,Warren didnt make his billions in 10 years. He made it through patience and discipline in >50 years of investing. Often, Time in the market is more important than timing the market.

Principles of Value Investing as taught and applied by great investment gurus like Benjamin Graham, Warren Buffet and Philip Fisher could help you to ride this tiger firmly and wisely without taking any undue risks on the invested capital and still create millions and perhaps billions.

One of the objectives of this blog is to create awareness about this huge opportunity when one can make tons of wealth through value investing in Indian markets for the next 40 years.

All the best for safe and productive riding.

Cheers
Amardeep Mallik
email: amallik@mailcity.com

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How efficient is the Efficient market theory?

Efficient market theory is one of the key theories of modern finance. It challenges the concept of value investing.Widely taught in all Ivy league universities, it says that its impossible to beat markets consistently as markets  are super efficient in capturing all the relevant and latest information and events Therefore no living mortal can achieve better returns than market consistently.

Many of the big investment gurus have scoffed at the efficiency of the market .

Warren buffet once said that "if markets were so efficient as the accadmecians would like us to believe , then I would have been a bum sitting with a tin cup"

Graham once said that "market was a  voting machine in short term and weighing machine in long term". That means markets are unpredictable in short term but eventually prices the value of the assets right in the long term.

He likened market to "manic depressive" guy who had frequent bouts of extreme mood swings  and was  either very ecstatic or depressed on a given day. He called the guy "Mr Market". He taught his numerous disciples that if you get carried away by Mr.Market's wild mood swings , you are doomed as an investor. However , if you learn to exploit his mood swings in a wise manner , you would be a winner. 

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What is "Value Investing"

Value Investing : This is a investment philosophy , conceptualized by Benjamin Graham in 1949 in his book "Intelligent investor" . Benjamin Graham is known as the greatest investment guru of 20th century - mentor to legendary Warren Buffet. Its an investing style which demands investing in assets/stocks available at a price which offers substantial discount or "margin of safety"with respect to intrinsic value.

Margin of safety: This concept has been considered as key cornerstone of value investing by big investors like Graham and Buffet. Margin of safety is the difference between market price and intrinsic value of the asset. The return on investment is directly linked to the margin of safety you deploy.

Intrinsic Value: The actual or true value of a security or asset ,which  may not be equal to its market price or book value.  It is ordinarily calculated by summing the future income/cash flows generated by the asset, and discounting it to the present value.

" Price is what you pay and value is what you get" -  Warren Buffet

Value Investing Rule No.1 : Never loose your capital . Always preserve it.
                        Rule No.2 : Never forget Rule No.1
                        - Warren Buffet

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