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The Way We Are

The daily shenanigans of the markets will be scary, but longer-term trends will play out & the basics will remain the same…

MFI will be 10 next year. Unlike children, it still has time before it reaches puberty. Yet, it has seen more as a toddler than most people would have seen in an entire lifetime. For starters, it was born when the world had already changed, i.e. after 9/11. The IT Boom had just gone bust, and the Sensex had dropped to 2800, and Mr Greenspan was just embarking on the biggest (mis) policy of the century, something that would leave its stamp on a generation to come.

A lot has changed during this period and yet, some things have not. The tone of my own columns has traced this change; I started with observations about human beings, trying to ‘be different’ by pointing out some home-grown observations about human irrationality (e.g. “How To Park Your Car”). This, I thought then, would be original stuff and I had limitless content, taking the broad principles and applying them to the many dimensions of economic life.

The facts followed me in my journey. As India got integrated into the world economy, so did the Indian markets. The result was a classic ‘globalisation of irrationality’ that saw itself play out in mini-form in India. Most of the stuff that happened in India traces its roots to some global event or trend, until today we pass off anything that cannot be immediately explained, as ‘global cues’.

Others will tell you how the facts evolved during this period. As usual, I will stick to the philosophy and the principles to be derived from it. Markets are supposed to forecast the future and ‘discount’ prospects. In the short run, they are reactive ‘voting’ machines. In the long run, they are discounting/ forecasting machines. They are also culling machines, routinely decimating the wealth of those who ‘react’, while at the same time creating impossible wealth for those who ‘forecast’ AND survive the mayhem wrought by the stampedes of those who react. This paragraph is particularly topical at this time of writing.

For the Indian reader of MFI, and maybe for MFI itself, the journey (with the benefit of hindsight) should have been fairly simple and straightforward. Most of the bad news has emanated from the ‘global cues’, to which India has been exposed as an afterthought (and an aftershock). The irrationality that has to be survived is that of the global economy, which includes FII flows. The Indian economy has charted a fairly secular course through this last decade, cruising along in second gear. Yes, there are those who complain that it can do better, but it certainly is not part of the (global) problem. Nor has it contributed much to the debt woes of the world (thanks to some intelligent policing at the RBI). In this context, I must thank our stars that an Indian Mr Greenspan never got close to the RBI Governor’s seat…we are rather satisfied with the Reddy-Rao axis!!!

So you, my reader (and the MFI) would have done well (in hindsight) if you just stuck to your “I love India” bumper sticker. You just had to step back and survive the herds of exiting investors that periodically react to something happening somewhere else. If they heard a different drummer, it was not a beat meant for you. You just had to survive the stampeding herds and (you) would do well.

I remember that from the scorched markets of 2002-03, I picked up a purely domestic Indian play (on sugar), a well-known company (Balrampur Chini) that gave me 42x my money over three years, on an investment of three years’ salary. My (financial) life was never the same after that.

I mention this to bring home to you how, in exactly the kind of times that we are facing just now, it is possible to pick up a very good stock, believe in it, hold on to it with tenacity, and with (just a little bit of luck), reap life-changing rewards. This is not available to everyone, but to readers of this magazine, you have a chance.

Would you believe that before the steel cycle turned up (with China) in the last decade, SAIL used to quote at Rs 5. It went up to 230 in a fairly predictable fashion. There are many such stories across India, which are available to you and me. That (apart from the fact that we have real jobs and maids) is what makes us much more fortunate than those who live in the West.

What has changed during this period is recounted every day in the papers, so I will spend little time on it. But mainly, it is the integration of markets, the way currency markets impact equities, commodity and bond markets affect everyone else in an interwoven mesh that really plays out Complexity Theory (remember the quote about the fluttering of the wings of a butterfly in Louisiana causing famine in China). These days, I find myself reading Der Speigel, a German newspaper, to figure out the intentions of the Freedom Party, which is a coalition partner to Angela Merkel. If they vote against the support to the EFSF, the Eurozone will collapse and that will affect my holdings in Tata Steel. How’s that for complexity?Most of you innocent buyers in Tata Steel would not even know of the EFSF, let alone who Angela Merkel is…

It is no longer enough being a ‘fundamentalist’, because you might be waiting forever for the market to discover your stock. Especially when little known companies have to build ‘market reputation’ (which includes a reputation for corporate governance, a much-vaunted and rare attribute these days), you might find yourself going wrong with the punt of a lifetime.

Technical analysis is a little better than astrology; if you read these chartists carefully, you will find they have a margin of error of 50 per cent. If you want to play the price discovery process, it is far better to try and be ‘last man standing’. Read the Art of War by Sun Tzu, lots of statistical modelling (which is NOT the same as technical analysis) and Nassim Taleb to complete your education.

The road to success hasn’t changed, although it looks very different these days. If you get your investing model right, there is a big market for your skills, which wasn’t so earlier. Just make sure that you don’t just study ‘what to buy’, but the price discovery process itself. When you do the latter, you will find yourself looking at complexity coming from forex, bond and derivative markets, besides commodities and ‘flows’, a new variable these days.

In equity markets, at least, the old formula hasn’t changed. To take the example above, it doesn’t really matter whether Merkel stays in power or not. If I buy Tata Steel at a 35 per cent discount to Book Value, I will be rewarded one day. The daily shenanigans of FIIs and markets will scare me, but longer-term trends will play out. Good managements will do better than bad managements, good business models will survive. The basics remain the same.

The formula for the next decade is known: buy India, buy companies growing in the domestic space, with good business models, corporate governance, technology and a healthy balance sheet. And stop reading the (pink) papers thereafter; I promise you, that is NOT good for your financial health.