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Anti-value investing

Value Investing has few followers in India, but that's something that needs to change as our equity markets evolve

Few weeks ago, we interviewed Bharat Shah of ASK Group. I've followed Shah as an investment manager for close to two decades, back in the days when he was first making his name as a fund manager. In fact, when I launched Value Research's first magazine, 'Mutual Fund Insight' twelve years ago, Shah's interview was in the first issue.

Like all investment managers he has had his ups and downs. However, his evaluation of-and enthusiasm for-inherently optimistic situations in the markets is noteworthy. In this interview, he lays down his case for why India is on the verge of breaking out into the biggest and longest ever sustained rise in the equity markets. Shah says that the kind of growth and equity returns that we are about to see has never been seen before in India. He paints a most optimistic picture, whose implication is that for ten years, corporate profits and stock prices will grow at about 15-20 per cent a year.

The implications of 20 per cent growth for ten years are interesting, to say the least. It implies that the BSE Sensex will be at about 1.5 lakh points in 2024. But Shah doesn't just throw out a number, he actually does build a case for it. For the most part, I agree with his logic. However, I believe that there's another trend whose time is coming.

The other day, on the Business Insider website, I came across an article with the rather provocative headline, '30 Years Ago, Warren Buffett Gave Away The Secret To Good Investing And Correctly Predicted No One Would Listen'. This secret that Warren Buffett gave away had first been given away 50 years before that by Benjamin Graham, when he and his collaborator David Dodd published their book Security Analysis.

Even though 80 years have gone by, the basic principle that can be derived from this book stays just as true, and just as thoroughly ignored by investors, which is Value Investing. Or, as Buffett puts it, "...the search for discrepancies between the value of a business and the price of small pieces of that business in that market." Value Investing has few followers in India, but that's something that needs to change as our equity markets evolve. For long, equity investing in India has mostly been about chasing growth. Even our largest companies often grew at a pace when it became appeared to be less important to try and guess the inherent value of the business simply because that value could change so rapidly.

However, I believe those days are gone forever. A sensible focus on the underlying business, as well as a fair evaluation of its intrinsic value is now indispensable for the Indian equity investor. It's often said that a rising tide lifts all boats, but many of the boats are too leaky to stay afloat no matter how high the tide rises.

The most extreme 'anti-value' investing that appears to be going on in India is in e-commerce and related fields. Here, in what is a throwback to the worst excesses of the dotcom era, we have Venture Capitalists throwing thousands of crores of rupees at businesses that have no easy way to profitability. It takes my mind back to India's original high-profile ecommerce portal, one jaldi.com which was run by a company called KLG Systel during the boom. KLG Systel was liquidated a few days back.

Will the current e-commerce darlings eventually face the same fate? Given their CEO's open disdain for profits, the tenets of value investing say that they might.