Friday, January 27, 2006

Why I favour the “value investing” philosophy

I was born in a fairly “well to do” traditional joint family in Kerala. The family had a good income from it’s business – it owned a large amount of land, two textile shops, an umbrella factory (it still does) and even a bank

(Lord Krishna Bank – ). Anyway I was oblivious to all this and was happy growing up in a joint family with lots of kids (cousins, relatives) to play with and enjoy child hood with. Though the family was well to do, when I was a kid, I did not see much money or nor was I given much money.

One thing that was available in plenty were books. The family had an extensive library with books on all kind of topics available – anyone who bought a book in the family on any subject usually deposited it in the library and for me it was an Aladdin’s cave of treasures!!.

It was also customary that a large number of newspapers and periodicals were subscribed to (I remember counting at least 5 newspapers and 6 periodicals at one time) and am thankful to some of these for developing my “world view” and giving me an insight to the world outside an insular Kerala.

Now, you must be wondering what this autobiographical account has to do with value investing but then I believe this phase of my life really shaped my attitudes and out look which made me more receptive to the value investing philosophy.

I remember attending the bank’s board meetings when I was in 8th standard or so along with my father though my only interest at that point of time was gorging on the snacks that was available!!. Also, my interest in computers was piqued when Lord Krishna bank inaugurated its first “EDP” (Electronic Data Processing) department.

This phase of my life instilled in me the values that one cannot make money by hook or crook, you have to really work hard for money, and most importantly, that you cannot judge a book by it’s cover (Link to value investing any one??).

The next phase of my (investing?) life started after my 10th standard. I had about 2000 Rs saved in the bank and made my first investment – a Canara bank mutual fund (Canstar? – I do not remember the name clearly). This was also the time of the big bull – Harshad Mehta. I remember the N.A.V of my mutual fund going up from 10 to 40 and begging my brother to sell – saying that the price was obscene and it won’t last . Also remember my brother buying ACC at 5000 Rs and begging him to sell when it was at 10, 000 saying that no way a cement company can be valued at that level. He did not listen to me and lost his shirt in the market. Around 10 lakhs. Also, remember my cousin who was a sub broker in the Cochin (now Kochi) Stock Exchange telling me that the prices will never go down and then staring at complete ruin after the stock market scam broke.

This changed or rather reinforced my outlook. I never believed that a stock goes up or will go up because some one important took fancy to it or because the “trend” of the stock is “up’. Always believed that there was something more fundamental (remember not to judge a book by it’s cover?) about a stock though I never knew what it was.

Then one day (this is more recent history) I read about Warren Buffett in a newspaper and I was hooked !!!. Here was someone who makes absolute sense!!. Here is a philosophy I can identify with!!

One thing I have noticed about value investing is that either you GET it or you don’t. I have tried to preach value investing among my colleagues but very, very few get it the first time. Maybe it is a temperament thing or may be how you grew up or how you formed your worldview has something to do with it.

Thursday, January 26, 2006

Why India is not yet a mature market and will not be for a long time.

The stock markets are on a roll right now with Sensex touching 9700 yesterday. Everyone talks of "Sensex touching 10000", "huge earnings growth", "India's time has arrived" etc. Among all this hype and hoopla, what has been conveniently ignored is that there is very little retail participation in the markets. I read somewhere that only 2% of the total retail (house hold) savings are invested in stocks.

The reasons for this is not difficult to find. In my opinion, there are mainly two reasons:

  1. Ignorance of what a stock is, what it represents and how the market operates. Well, the ignorance is not limited stocks alone – it extends to almost all avenues of investment.
  2. A lack of true information – fundamental research, latest company information and basic tools that will help an investor.
A case in the point is my futile search for a reliable stock screen. All the ones I saw were either too restricted or had old data – often wrong data. I’m willing to pay for a good one but they are just not available.

It is only when the world of investment – be it stocks or mutual funds (Real estate, government bonds, gold and bank deposits do not count – we Indian’s “invest” too much in them) is made accessible to common man thorough proper investment education and there are reliable channels of information will the retail participation in the markets grow.