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Clearance Sale Of Stocks

The current market offers plenty of bargain stocks to investors who can watch, study & choose carefully…

It’s hard to remember a time when the economic and investment outlook appeared so bleak. Even during the dark days of 2008 and 2009, some silver linings were visible. For one, it seemed clear that this was a crisis of the Western world and that India (along with China and the rest of the emerging markets) would be affected only peripherally in the long run. Moreover, after the Lehman blip, governments and central bankers around the world did exactly what was needed and did it quickly.

This time, it’s different. None of those silver linings are there. And for that reason alone, it’s the right time to invest in equities. I guess you are justified in reading and re-reading that sentence. But the logic is clear. It has long been said that the time to buy is when there’s blood on the streets. Well, there you are. The streets (Wall Street and Dalal Street, I mean) are amply splattered with blood right now. In fact, they look like a casualty wards for stocks. But that’s not the right metaphor. Actually, it’s like a post-Diwali clearance sale of stocks. There are plenty of good bargains and for the investor who is willing to watch, study and choose carefully, this is not the time to stand and wait.

Most of the content in our magazine is intended to help you do just that. The idea behind our approach to investing in times like these is very simple. There are certain characteristics that mark out companies that have a higher likelihood of turning out to be robust investments. We use these markers to filter out these companies and then apply other selection criteria to them. There are three major markers we use. The first is growth at a reasonable price.

Normally, stocks that have a track record of sustaining high growth are expensive. They have high valuations because growth is what the markets chase above everything. However, this is the best of times to chase these kinds of stocks. The generally depressed state of the markets means that growth is available at a far more reasonable price than is normal.

The second theme that’s a favourite of ours is a track record of sustained or growing dividend. Stocks with significant dividend-paying ability have never been a favourite of a significant proportion of Indian investors. To some extent, this is understandable. A fast-growing and fast-changing economy has so much scope for growth that the inherent dullness of dividend stocks finds relatively fewer fans. However, we believe that paying dividends regularly is a marker of the quality of the underlying finances. There are ifs and buts like the level of promoter stake, but used as a primary filter we have always found dividend stocks to be a useful measure for stock selection.

The third measure is the price to book value ratio. The P/BV ratio of a company is a useful hard-headed measure of how expensive or how cheap a stock is. This is a good way of finding out which companies are under-priced and which are over-priced in the markets. As such, it is a useful marker for the value investor. It must be pointed out that when I call these characteristics ‘markers’, that’s exactly what I mean. These are just starting points, initial filters that serve as much to eliminate stocks as to select them. What these measures say about any individual stock is not precise. Nonetheless, they give a good starting point to our analysts.

Still, the first point I made is the most important one, which is that investors should not pay too much attention to the general conditions of the world and the markets. It’s best to see these as nothing more than a way of buying stocks cheaply.