Safe & Steady way to returns

Investors have just become a lot poorer!

The weakening of the crude along with the 20% upswing of the equities from the lows of July 2008 has made investors doubt the sustainability of the up move! The worry is whether the upbeat seen in the corporate profits in Q1FY09 can be sustained in the Q2 FY09 or not?

Equity markets are supposed to be a place to invest your extra money for the long term. A steady and patient investor in the Indian stock markets would have made nearly 20% every year for the past about 28 years. The steady investor would have made about 160 times his initial investment over this 28-year time period that has seen Indian politics head from bad to worse. India’s GDP has had an average growth of about 6.20% per annum. One of the best rates of growth of any country in the world.

The long term potential for the growth of the Indian economy has not changed. The long term potential for making your extra money earn more money while you go about your daily work has not changed. What has changed is the greed of the gambling crowds. The greed which was evident until December 2007 has now turned to a panic like fear.

Underlying Strength 

The oil prices have increased. Food prices have zoomed. And the cost of borrowing money has increased. To top it all, we have election coming up. All of these will cause some slow down and some pain. But a lot of these factors are cyclical—their importance tends to shine or fade over time. We have had elections before –in fact 7 elections between the 1980 & 2008 time period. We are still around and relatively more prosperous as a country. Why should things be different after the next election? 

As an investment manager, the challenge is not figuring whether FIIs will come again to invest in India or whether India has a future or not, rather, to identify companies and managements that can build solid long term businesses.  The idea is to prepare ourselves for the times (the last 6 months) when the investors – both large and retail—scramble out and head for the exit in panic. Profits are made when there is a difference between perception and reality. Today, people perceive stock market as the worst place to invest. 

The reality is that there are many companies that will do well over the next few years whose share prices have been hammered. These are great stocks to buy because of the underlying strength of their businesses. So as the short term investors sell the stocks, we should be happily buying the businesses that those underlying stocks represent.