India's back on investor's radar as a growth story, however our challenge remains to understand and analyze businesses and their leaders.
“The common thing about all you value managers”, said our observant guest “is that you all write well.”
You can tell the weather in the northern hemisphere from the frequency of visitors to our offices in Bombay (or Mumbai - for those who wish to be politically correct). Between April to September, there is a mere trickle of investors to our offices. The weather is too nice in Europe and North America and India is drenched in dusty sun, followed by the relentless monsoon rain.
By October – as temperatures drop in the northern hemisphere – the frequency of visitors increases. And so the curious pour in with the standard questions: Who are you guys? What is your history? Why have we not heard about you before? Why do you have 80 people in your company? What do they do? And, goodness me, what is a “value” manager doing in a growth place like India?
Kind of “what’s a nice girl like you doing in a place like this?” The difference being that many who drop by India do not really want the nice girls like us!
While weather determines the short term frequency of visitors, it would be fair to suggest that the number of visitors over the long term is directly proportional to the amount of foreign money invested in India. As more money poured in, more people landed up on the shores of this emerging market. With tales of riches spreading far and wide this led to a virtuous cycle of more seekers in search of the modern day yellow BRIC road. And a higher level for the Index.
But there is another pattern to the frequency of our visitors. Just like a technical chartist talks about the short-term patterns, the intermediate patterns, and the secular long-term patterns; so the occupancy of our office meetings rooms are influenced by:
- the short term calendar patterns which tell us to expect more visitors in the winter months,
- the secular pattern of more money flows which tell us that we will see a lot more visitors in the future, and
- the intermediate “market valuation” patterns which determine the intensity of the visits.
A fair amount of people came by to meet us around the time of green shoots (circa March 2009 when the BSE-30 Index was 8,200 when India was a “value” market) right through their “disbelief” in the India story (circa July 2010 when the Index was 17,000).
Now, despite the seasonal impact clearly in our favour (it is getting cold in the northern hemisphere), and the long term secular story for India being better than it ever was (if the record money flows for CY 2010 are any indicator), the bad news for our conference rooms is that the valuation pattern is smack against us. India is no longer a value manager’s dream.
So, we are seeing more visitors, but not anywhere close to peak levels. And we can’t really blame them. India is back to being a growth story and why, goodness me, would anyone want to meet a “value” manager - even one with a decent track record and a decent sized team? No time for the nice girls.
So, dear reader, we are left in peace with no distraction of commentary and meetings to focus on our writing and to prove the theory that the common thing about us value managers is that we write well.
Our challenge remains: to understand and analyze the businesses; to decipher the valuations ascribed to these businesses in the stock market; and to understand the ability of the management to guide these businesses in challenging times - the unflinching question of leadership is crucial.
Who leads the company?
And under what principles?
What are the motives of the founders and their senior executives?
Are their motives aligned with ours as long term investors or are they siphoning out money to get an extra share of profit for the same risk?
Is expansion a part of an ego trip? Is free money leading to free thinking and silly ventures?
Yes, you can make money in India over the next decade. But the smartest investors, blinded by greed, may not see their fair share of profits for the identical risk taken by them as co-shareholders with India’s creative founding families. And paying the right price for the business at the right time would help long term returns. Being the first to predict a 20,000 level for the BSE-30 Index in November 2008 we now aim for the dubious distinction of saying, “be careful”.
In the meantime, as you make the “risky” decision to invest in the volatile stock markets of India, it is our job as disciplined, long term, value investors to assess the risks of managements and valuations. To reduce your risks so that you can get your fair share of profits as the growth of the Indian economy generates significant investment returns over the next decade.
