Sunday, February 28, 2010

What has budget to do with investing

I was recently talking to an investor who said he is waiting for the budgets to enter markets. Previously he was waiting for the RBI Monetary policy to be announced to enter the markets. I am sure he would have been waiting for some other event to have occurred for investing. This is a sure shot case of doubting what you are doing or simply having no clarity. As many fund managers say, they are investing in a 100 Companies to diversify risk. Diversification is done by people who are not sure of what they are doing. The answer to this is business perspective investing as the Great Warren does. Budgets or otherwise, investments are made when you find the right kind of businesses that generate cash and increases earnings year and offer superior Return on Equity. These are those companies that are run by very sound management, more so they are business where they have a very unique value to offer or stickiness. Such companies rarely come under pricing pressure because of competition or economic vagaries, except in the very short sense. Finding such companies only need common sense. Wise investors invest when the prospects of the business seems the bleakest. There are short term setbacks that can not affect the underlying business model or services it offers.

Since the market is mostly full with speculators, they offer premium in analysing present results. If the company in question had bad results, the markets beat them down even if the company has history of doing well and rewarding high earnings. The market then believes the future is bad which not the case is. To the intelligent investor, these provide the rare and great opportunity to invest with a long term perspective. This sounds astoundingly simple, the trouble is for the ones who monitor the sensex on a regular basis. Instead monitor the quarterly results of the company in question. How many of us do that? Unfortunately there is no formal education available in business perspective investing. But think about it.

The great Graham believed markets comprised of 2 components. One is long term investment oriented, which means over a period of time markets will price the stocks based on its business earnings. The other component is like a casino; investors gamble based on the short term fluctuation of prices based on news and events. They speculate based on the impact daily information would have on the price movement of the stock. The long-term investment nature of the market will surely and always hike up the prices of company’s stock, if it is the right business adding to the company’s net worth and demonstrated continuous growth in its EPS.

I wish you a very eventful and happy week ahead.

Naresh Pisharody

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