Category: Excerpts

The second data point is a list of 70-odd Indian listed companies where between 50-85% of the free float is captured by foreign and local institutions (ex-insurance companies). And since the incentives of people at the helm of such institutions are heavily loaded on the long side, they would do anything to keep the NAV and AUM up.

So we have companies trading at 50x and 60x and 70x and even more than 100x P/E; and this despite the underlying corporate earnings not really justifying such valuations. The P/E (trailing twelve months) of Colgate has gone up from 34x in April 2014 to currently 48x. Similarly, Nestle from 42x to 53x, HUL from 33x to 44x, Dabur from 36x to 43x, Marico from 28x to 38x, etc. This is despite sales growth being slowest in the last many quarters for some of these companies (in some cases, up to eight quarters!). Similarly the P/E of some pharma companies have gone from mid-20x in April 2014 to mid-30x currently. The two other sectors which are captured by these institutions (partly overlapping with the two mentioned above) are MNCs and scarce/unique ideas. So, any MNC with a 75% parent holding is supposed to be a delisting candidate that justifies a ‘mu-maangi kimat’ for the tenderer (Blue Dart > 115x, 3M 90x, Kennametal 90x, Glaxo Pharma 60x, Bosch 60x). Scarce concepts in the listed space also command mind-boggling valuations (Just Dial 80x, Info Edge 80x, Jubilant Foodworks 75x, Page Industries 70x, Eicher Motors 60x etc.).

The valuation of concept stocks in the unlisted space are truly what Warren Buffett calls Alice in Wonderland (upto 1000x sales!). Finally, we have some random stocks from not-so-fancied sectors such as retail, textiles, ancillaries, construction/realty and capital goods etc. which also find a place in this list; clearly a case of the fund manager trying to buy as much floating stock as he can, so as not to let his NAV drop and pre-empt a premature end to his career-wrote Chaitanya Dalmia

American virologist David Baltimore, who won the Nobel Prize for Medicine in 1975 for his work on the genetic mechanisms of viruses, once told me that over the years (and especially while he was president of CalTech) he had received many manuscripts claiming to have solved some great scientific problem or to have overthrown the existing scientific paradigm to provide some grand theory of everything. Most prominent scientists have drawers full of similar submissions, almost always from people who work alone and outside of the scientific community. Unfortunately, none of these offerings has done anything remotely close to what was claimed, and Dr. Baltimore offered some fascinating insight into why he thinks that’s so. At its best, he noted, good science is a collaborative, community effort. On the other hand, crackpots work alone.

Similarly, the idea of a lone genius changing the world is also a myth. As The Los Angeles Times reported about Bill Gross and PIMCO, “In the wake of [Mohammed] El-Erian’s departure, stories leaked out about Gross’ imperious behavior – traders were forbidden to speak to him or even make eye contact on the trading floor, the Wall Street Journal reported. He brooked no discussion or debate about his trading strategies and became hostile to rising talents on the floor.” Whether we’re talking about Lennon and McCartney or Warren Buffett and Charlie Munger, we all work better with help, advice, support, correction, criticism and accountability. Make sure you aren’t trying to go it alone in the investment world.

-from RPSeaWright