Bharat Shah veteran who spoke recently at Calcutta chamber of commerce.
Good Perspectives. Must Read.
• Equity investing is not gambling and approach it in a long term mind set
• 6000+ listed in Indian exchange of which 90% of business do not deserve attention, forget about investing
• 90% management cannot be trusted, unreliable or do not have the needed competency
• Limited business need our attention
• Buy Quality business at fair and sensible price
• Investors must have capability to stomach up and down and volatility of the market
• Business are created over a period of time and takes time to create value – So equity investing must be long term oriented
• There is nothing safer than equity investing – Impossible to lose money – You have to really really work hard to lose money in the markets
• Commit on a long term basis rather than flirt with stocks
What participants see as RISK?
• Volatility of the prices is a risk, but that is not the source of risk
• Risk in equity investing is inability or inopportune timing to benefit from the market at the precise point of time
• Both are farthest from truth
• Market were volatile 100 years back and in my 32 years of investing career
• No reason to believe that market will not be volatile in future
• Markets will always be volatile, sometimes more, sometimes less, sometimes in narrow range, sometimes in a wide band – It is an intrinsic character of market
• It is not an enemy or threat, but a friend, if you know how to benefit from it
• If you are accepting the fact that volatility of 5, 10 and 15% is fairly common, and then you do not see it unusual
• 20-30% kind of changes is less often, happens once in a few year
• 30-40% or higher, once in 7 – 10 years
• Once in 20 – 25 years, you will witness 50% of a more up or down in the markets. Once you accept market are volatile, you arrange affairs in such a way, rather than getting intimidated, we rather get benefited.
• Prices eventually match the underlying value of the business
• But price will not be close to value all the time
• Price is a slave of underlying worthy, which is again a slave of real profit (Real cash flow)
• Ultimately value creation is a price of quality earnings
• Even if price > Value, time to time, they do come closer
• If prices are below the value, then at some stage, the price will cross the value
• If you can judge the real value, if you price is below the understood value, it is mathematical, the price that you are locked at lower level will rise to move higher value
• MOS – Not a mythical idea, really at the heart of investing
• If you have ability and method to judge the real value of business, price is cheaper than value, there is MOS, eventually P=V, the inverse of MOS is extra ordinary return, yu pocket
• Long term annuity part comes from the earnings, if cash flows rise, it is a excellent proxy, for value of the company
• Business growing at 15-16%, then after 15 years, the growth will be closer to it
Three sets of Return:
• One time returns from MOS and NAV of the underlined long term earnings growth
• Earnings growth is a excellent proxy for long term returns (Cake)
• Quality of growth: x% next few years, if the quality is superior, the returns will be x+y and if inferior, it becomes x-y% (This returns if like icing of cake)
• Treat investing like marriage, It is impossible over a period of time to lose money in quality investing, In fact, no other asset is remotely comparable in terms of returns on equity. No other asset can deliver superior returns
• 3 enemies that the assets need to fight: (1) Inflation, (2) cost associated with a particular asset (Real estate, buying, maintaining the asset, FD has no cost, Equity has nominal cost), (3) Taxation (The treatment varies). Talk about real returns and not gross returns, deduct all these 3 costs. What ever is left is the real return.