Mr Market is in a nasty mood


Director, Banyan Tree Advisors

December 20, 2011

Buy good companies now and hang in there. Don’t let the opportunity pass by.

LOOKING AT the stocks pages in the daily newspapers makes me wonder if the world as we know it is coming to an end. The number of stocks hitting 52-week or all-time lows fills up an entire page. And many of these stocks were the darlings of the market just 12 months ago.

What causes such wild swings? These days, I often think of Ben Graham’s concept of a manic-depressive Mr Market. Up and about, prancing to some funky hip-hop one day, and so low the next that even K.L. Sehgal would sound cheerful in comparison. But why does this happen? Why is it that the same people who bought Wipro at Rs 10,000 in the hope that it would touch circuit breakers daily, do not want it at Rs 1,500?

Instant crorepatis. The answer to that lies in the lure of making a quick buck. Almost everyone who knows me has asked me for short-term tips — “something that will go up in a few weeks”. Well, if I knew that, I’d be smoking a cigar on a beach in my own island in the Pacific. But most people, dreaming of becoming crorepatis overnight, get caught up in the mad rush of the market with no clue about what they are buying and what they are paying for. They lap up the dreams that stock operators sell them and when things turn sour, as they seem to have now, they cry scam and abandon the market. Many of them swear never to return — until the next bubble comes along.

Time and again, stock operators have been able to drive prices to frenzied levels. It seems that we do not learn from our past mistakes. I wouldn’t be surprised if the same people who bought ACC at Rs 10,000 (Rs 1,000 adjusted for the Rs 10
face value) and Tisco at Rs 550 were the ones buying Global Tele at Rs 1,600 and Himachal Futuristic at Rs 2,800 odd. While the last time around, the name of the game was ‘cost of replacement of capacity’, this time it was momentum. The
media obliged by terming a few shares ‘momentum stocks’ and investors happily lapped this up. The funny side to this otherwise macabre tale is that investors (or should I say speculators?) were given a clue about things to come from the name itself. All they had to do was open a dictionary to check what momentum meant, and they would have known how this madness would end.

Moved by consensus. But these are wise words — after the event. And you are probably wondering why I wasn’t around to offer these words of wisdom when the market was up. I did — at almost every gathering I went to, I did not tire of telling
people that the market was overheated. But my warnings were usually laughed off. I was told I was a party pooper. I had no clue of how the New Economy operated and that an era of prosperity was about to dawn, which my short sightedness prevented me from seeing. So to avoid being beaten up, I shut up! What’s worse, I was swayed by the mood of the party and had to pay a price for joining in.

Back in 1991, when I was doing my management studies, I decided to play a game. I created a hypothetical portfolio that I would change on a daily basis. I would look at the daily newspaper, try to analyse the news, and on that basis, buy and sell stocks in my hypothetical portfolio. After a few months, I was a little surprised to find that my analysis was not leading me anywhere and that I was lucky to have kept my portfolio at a hypothetical level. Many investors tend to follow this same game with their not so hypothetical portfolios. Investing according to the news flow is the worst thing you can do. Because, more often than not, when the news hits the stands, scores of people have had the information or anticipated it long before. You are probably among the last group of people to get the news. So, be wary of investing on the basis of news !

Dealing with a manic-depressive. So how should the intelligent investor deal with Mr Market? Ben Graham suggests that you treat Mr Market as a manic-depressive partner in a business (Remember, owning one share in a company makes you a part owner in the business). One of Mr Market’s endearing characteristics is that he does not mind being ignored. If his quote is not of interest to you today, he will be back tomorrow with a new one, at which he will either buy your share in the business or sell you his share. The worst you can do is to join in his manic-depressive ways. However, if you know what your business is worth, you can take advantage of his swinging moods to your benefit.

The depressed market scenario now offers a number of buying opportunities for the long-term investor, both in the New and the Old Economy. For, while the software sector has fallen prey to expectations of a severe US tech slowdown, the expose has meant that Old Economy has not been spared either. However, it is important not to buy everything that is down from its high — there are some stocks that will never regain their previous glory. Focus on companies with good management, intent on generating cash flows and do not invest on the basis of dreams that someone sells you. This is not to say that stocks will not go lower than they already are — the pendulum usually swings to an extreme and you would do better to stagger your purchases. But if you buy good companies now and hang in there, you should be able to look back at this next March as an opportunity you didn’t let pass. Be greedy when others are fearful and vice versa, and you can profit from Mr Market’s mood swings.