If there was a virus that is hurting the Indian equity investor, we could probably call it Macroanalitis. Terms like fiscal deficit and current account deficit have become so commonplace that one wonders why people never thought about these numbers earlier. The big picture is so scary that it is blinding the investor from seeing anything else. India’s macro is bad. No two opinions on that. But, the stock market always moves ahead of the present and into the future. That brings up the critical questions. Can our macros get any worse? Should we secularly punish equities as an asset class? Most of us will agree that the worst will be behind us sooner than we expect. In fact, the savaging of parts of the market is throwing up investment bargains by the day. In the case of many structurally well managed mutual funds, there is a strong case of undervaluation. The odds clearly look like this. The limited downside in valuations clearly supports the idea of taking on risk. What investors need to understand is that risk must be taken on in a phased manner. By doing so, one can effectively overcome timing risk and market risk while taking advantage of opportunities thrown up by the undervaluation of equities. The call an investor needs to take is whether he is going to make his portfolio efficient by buying cheap now or wait for the markets to get more efficient and pay a hefty price for it.
There is no such thing called an efficient market. There are only efficient investors.
Contrarian investing is a much-discussed subject. We all know that buying when there is blood on the street is the way to wealth. But, blindly buying when there is blood on the street could also leave you holding onto a dying animal. The risk of corporate governance is very material to the success of contrarian investing. When greedy promoters leverage their company, their promoter capital, and everything they have to build their market capitalization, the risk they create increases geometrically. It is like a cascade of risk. When the promoter reaches a dead end, the show collapses. We call it the `Hyderabad blues’ after seeing several Hyderabad based companies follow this pattern of operating. The show stopper was of course Satyam. This brings us to the question of what goes wrong in these companies? One, leverage kills when it doesn’t create returns to support it. Two, excess leverage inevitably turns your business operations into a hedge fund. Three, leverage on the company, the promoter, and the market capitalization will inevitably lead to the collapse of all three. The success of one company in India in protecting all three over the past three decades by following this model is possibly a product of the times they operated. Those times are over. This is why we find many companies following the same model of governance simply sinking without a trace. Investors are left fuming, angry, and despondent when they become victims of such companies. But, what you need to learn is to avoid such companies at any price. At times, the blood on the street may be that of a dying animal that cant be revived. Some birds simply cannot take flight again.
Time to build your investment book with a longer investment horizon.