Exactly four years ago, when the stock markets were racing to a new high practically every day, I wrote an article about the stock markets which had in it a story about monkeys and goats. Here's how it went.
One day a man appeared in a village and offered to buy all the monkeys that the villagers could supply for a thousand rupees each. The villagers caught all the monkeys around and sold them. Soon, another man appeared and offered two thousand rupees for each monkey. However, there weren't any more monkeys around so the villagers couldn't sell the man anything. However, they figured that for some reason, the demand for monkeys was going up so they looked for the first man and bought back all the monkeys for Rs 3000 each (which was the least the man was willing to take). Unfortunately, this stratagem was a failure and the buyer never reappeared, leaving the villagers stuck with the animals.
Nearby, there was another village, where the same story was repeated except here, it was about goats. Here too, the final buyer never appeared and the villagers were stuck with the goats. However, there was a big difference. The monkeys were a nuisance. They were noisy, troublesome, and dangerous; and they stole food all the time, so the villagers eventually abandoned them in the forest. The goats, however, weren't so bad. They were easy to keep, grazed on grass and gave milk. When they grew older, the villagers slaughtered them for meat. All in all, buying goats was not the bad deal that it looked like in the beginning.
The moral of the story is clear. When the stock markets were raging, all kinds stocks were available at foolish prices that could be justified only on the basis of a greater fool appearing. However, there were high-priced goats in the markets and there were high-priced monkeys. In 2007, there was a tremendous infestation of monkeys. There were infrastructure monkeys, there were real estate monkeys, large old monkeys, small young monkeys, there were even entire business groups made up of monkeys. Many of these monkeys were disguised as goats. These monkeys proved to be as troublesome for their buyers as the real ones.
In the four years since 2007 when I initially wrote the article, the difference between the goats and monkeys have become clear to everyone. Many of the monkey stocks are still 80 or 90 per cent below the peaks they hit in late 2007 or early 2008. On the other hand, many of the goats have done fine and still have great prospects in the future.
The best part of these events is that they have happened quickly and very vividly. The rise, the fall, the panic and the difference is so great that investors couldn't help but noticing this and taking to heart. An interesting confirmation of this phenomena came about recently in a discussion of fund managers organised by Value Research. One of India's best fund managers, Prashant Jain of HDFC Mutual Fund, said that even in today's market, there was a premium for quality. Interestingly, he also said something curious, that back in 2007, there was a discount on quality. That means that people were more eager to buy monkeys than goats and that they were actively ignoring the goats in their pursuit of monkeys. I guess the reason was that the monkey stories were carefully embellished while the goats were relying on reality.
Despite all the travails of the last few years, this new emphasis on reality-based investing is refreshing. All the fits and starts of Indian equities and the 'sideways market' or the 'time correction' that people keep complaining about points to the fact that there isn't enough quality in the Indian stock markets. Whatever little there is, is worth seeking out.