Be Choosy

The concert season is a time when the herd mentality will be on full display. Everybody would want to attend the same concerts. Tickets for a few concerts would be at a premium. Scarcity would prevail. The names that draw the crowds will be very familiar, popular and widely discussed. A cult following for a select few will be the order of the day. At the same time, there will be budding artists and emerging performers who will be singing to empty halls. Their concerts wont even be priced. They will be singing for free. Yet, there will be little interest in them among the elite. The elite wont be caught dead in a free concert. To them, it has to be marquee names. Only, those names that everybody knows and are sounding politically right when mentioned in gatherings. The story is no different in equity investing as we see it now. Marquee investors have their own marquee stocks. These are greatly in demand, widely discussed and much loved. Buyers flock to the same basket of investment of ideas and their flocking is leading to frothy valuations. Nobody wants to sell a stock as the scarcity is just too good to be ignored. Reinvestment in similar popular stocks is a challenge. On the other hand, we find neglected stocks in other sectors which are struggling to find takers. There is little light in sight for them. They need a structural recovery in the economy, recovery in capital goods and much more. But, the valuations of the neglected stocks are a stark contrast to the favored ones. They aren’t even remotely factoring in any good news they could land up with in the future. They are selling at abysmal valuations with little or no interest. Investors aren’t interested in their problems or the prospect of them getting solved. The crowds are too busy to even notice them. But, one thing is clear. Tomorrow’s stars will always be among today’s neglected pack. And, the challenge before an investment manager is to find ways of playing them for their clients.

The successful investor is usually an individual who is inherently interested in business problems.