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29-03-2013, 09:16 AM
http://atyantcapital.com/india/value-inv...a-is-dead/
March 12, 2013 by rahul
Long live value investing !
Benjamin Graham said that in the short run the market is a voting machine and in the long run the market is a weighing machine. Unfortunately for investors, he did not define the duration of the short run and the long run.
Ben’s basic premise was that over time the quoted value of a stock would reflect the underlying worth or the intrinsic value of the business it represented.
However, the reality of the stock market is that an investor in a stock makes money only if someone at sometime discovers or recognizes the intrinsic value of the business and pays up for the stock that was acquired by him at a lower price. Historically, the markets in the US and in the rest of the world have been through periods when quoted stock prices became severely disconnected from intrinsic value. Ben’s prescription during these times was that companies should buy back their undervalued stock to create value for continuing shareholders.
Warren Buffett mentions in his most recent letter to shareholders that buybacks create value for shareholders only when the buyback price is below the intrinsic value of the underlying business. Companies in emerging markets seldom buyback stock. And even when they do buyback stock, it is often at wrong prices and for the wrong reasons.
However, a company that does not buyback stock despite a steeply discounted stock price and sufficient cash on hand cannot be declared guilty by default. Often access to new capital is hard to come by in emerging markets and sacrificing liquidity can prove detrimental to the underlying business. Sometimes, regulation complicates the ability of a company to buyback stock. And finally, it is very hard even for honest and ethical managements to shrink the size of their businesses in order to create value for shareholders. One could consider this a strike against the management and the stock/business. In my experience and opinion, all else being equal, managements can and should be given the benefit of the doubt when it comes to buybacks in emerging markets like India.
Coming back to my original point, Ben Graham did not define the duration of the short run and the long run. When markets remain broken and discovery remains impaired for long periods of time (as has happened in the last 7 years), markets start to accept the result of the voting machine as the reality of the market. This has become evident to me in recent times. Discussions about valuations of companies are ignored and often scoffed at.
I recently mentioned to another fund manager friend of mine that a particular company had more cash on its books than its market cap and that the company continued to generate healthy cashflows. I further mentioned to him that the company was run by honest management and the cash was unlikely to be stolen or siphoned off. He immediately retorted that in that case why was the stock as cheap as it was and why hadn’t someone bid it up? He further asked why the management did not pay out the cash as a dividend or use it to buyback stock? I did not have answers to any of his questions. I didn’t know why no one else had bid up the stock and I certainly didn’t know why management had not distributed the cash to shareholders. However, I did know that the stock was at a significant discount to its intrinsic value and that intrinsic value was growing at a healthy rate.
Sometime in the not too distant future, risk appetite, animal spirits and liquidity will return to the Indian markets. At that time these very values will look ridiculous. Until then ….. Value Investing in India is Dead! Long live Value Investing!
March 12, 2013 by rahul
Long live value investing !
Benjamin Graham said that in the short run the market is a voting machine and in the long run the market is a weighing machine. Unfortunately for investors, he did not define the duration of the short run and the long run.
Ben’s basic premise was that over time the quoted value of a stock would reflect the underlying worth or the intrinsic value of the business it represented.
However, the reality of the stock market is that an investor in a stock makes money only if someone at sometime discovers or recognizes the intrinsic value of the business and pays up for the stock that was acquired by him at a lower price. Historically, the markets in the US and in the rest of the world have been through periods when quoted stock prices became severely disconnected from intrinsic value. Ben’s prescription during these times was that companies should buy back their undervalued stock to create value for continuing shareholders.
Warren Buffett mentions in his most recent letter to shareholders that buybacks create value for shareholders only when the buyback price is below the intrinsic value of the underlying business. Companies in emerging markets seldom buyback stock. And even when they do buyback stock, it is often at wrong prices and for the wrong reasons.
However, a company that does not buyback stock despite a steeply discounted stock price and sufficient cash on hand cannot be declared guilty by default. Often access to new capital is hard to come by in emerging markets and sacrificing liquidity can prove detrimental to the underlying business. Sometimes, regulation complicates the ability of a company to buyback stock. And finally, it is very hard even for honest and ethical managements to shrink the size of their businesses in order to create value for shareholders. One could consider this a strike against the management and the stock/business. In my experience and opinion, all else being equal, managements can and should be given the benefit of the doubt when it comes to buybacks in emerging markets like India.
Coming back to my original point, Ben Graham did not define the duration of the short run and the long run. When markets remain broken and discovery remains impaired for long periods of time (as has happened in the last 7 years), markets start to accept the result of the voting machine as the reality of the market. This has become evident to me in recent times. Discussions about valuations of companies are ignored and often scoffed at.
I recently mentioned to another fund manager friend of mine that a particular company had more cash on its books than its market cap and that the company continued to generate healthy cashflows. I further mentioned to him that the company was run by honest management and the cash was unlikely to be stolen or siphoned off. He immediately retorted that in that case why was the stock as cheap as it was and why hadn’t someone bid it up? He further asked why the management did not pay out the cash as a dividend or use it to buyback stock? I did not have answers to any of his questions. I didn’t know why no one else had bid up the stock and I certainly didn’t know why management had not distributed the cash to shareholders. However, I did know that the stock was at a significant discount to its intrinsic value and that intrinsic value was growing at a healthy rate.
Sometime in the not too distant future, risk appetite, animal spirits and liquidity will return to the Indian markets. At that time these very values will look ridiculous. Until then ….. Value Investing in India is Dead! Long live Value Investing!