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You don’t buy markets, you buy individual stocks: Bharat Shah

LiveMint logoLiveMint 15-06-2014 Lisa Pallavi Barbora

Bharat Shah, executive director, ASK Group, is known for his abilities in stock selection. A pure bottom up stock picker, he has been part of the Indian capital markets for nearly two decades. At ASK, he mentors the investment management business of the group and also provides strategic guidance to the heads of the various internal business segments. Shah believes that the equity market is not a place for generalists and investors should know and understand the dynamics of the companies they invest in.

Looking at the current valuations, do you think the stock markets have run ahead of fundamentals?

The question about whether valuations are expensive or not is irrelevant because you don’t buy markets, you buy individual stocks. I believe our economy is still standing at a threshold of an upswing. When there is a long and secular period ahead, don’t get distracted by being churlish about small points every now and then. That will take you away from the task of making a solid return over a period of time. If I am buying a stock, my concern is whether it is reasonably valued or not. Over a period of time, stock price is a function of only a few simple things: whether the business is profitable, whether profits convert to cash; and whether that is sustainable. If there are real earnings, which also reflect in cash, it will reflect in the price by way of upward revision, even if everybody is generally negative. Markets have no obligation to make you rich just because you have put money in the markets.

Often, certain stocks tend to rally on sentiment rather than value. What should one do in such cases?

While price is volatile, value doesn’t change that often. Value changes over a period of time while price will go through ups and downs during that period. The question to ask is whether the gap between price and value is favourable or unfavourable. If it’s favourable, then even if it has gone up, it’s alright. If the gap has been breached, then what you get is underlying economic return, but the discount that was there as an extra kicker, goes away.

How does one identify a good stock?

An investor’s duty is simple—identify good businesses, ones that have longevity, sustainability, predictability, opportunity and with capability to grow. Growth should also be backed by quality, which comes from an ability to create economic value. And that comes when you have a superior return on capital employed compared to your cost of capital. Higher the gap, bigger is the overall economic value creation. On top of it, if there is growth, then that economic value pie becomes bigger over a period of time. Your job as an investor is to be able to judge the value of the business. Thereafter, being disciplined to buy it at some margin of safety and then having the wisdom to stay with it even during temperamental quarks.

Just holding something for long doesn’t mean you are a good investor. You can hold rubbish, keep it for eternity, and it will destroy value.

Do global macroeconomic events have a bearing in the long run for the markets?

I have a very strong view when economics is applied to markets. I am not saying that markets are devoid of economic logic. But the tendency to get over-driven by consideration of economics, and based on that, trying to forecast the future of businesses, is found to be a very poor one. Economics is not really a precise science. There is a second category in the market which is called strategists. I never understood what exactly they do. Then there is a third category which tries to speak the language of science but which really is some form of personal art, which is technical. None of these, in my opinion, make any sense for investing. Noises will happen from time to time but these noises have an impact only at a point of time, and weak minds get consumed by it in making a judgement about individual stock. If your business is economics, of course, you should make that forecast. But if your business is investment, getting driven by too much of these macros is a bad way of investing.

You are known for identifying small businesses. What went wrong during the 2008 crash?

I can’t say that I handled it particularly well. It was a cataclysmic kind of a fall. In 2008, everything fell, even the larger ones. But when everything falls like a pack of cards, relatively larger businesses fall less. They aren’t necessarily superior or better. In some cases they were, but some other less superior ones also suffered a little less. At that point, my exposure to relatively big names was less and mid-size names were higher, hence the damage was higher for me. It is a significant lesson learnt from that period, ultimately there is no substitute for owning a high quality name and holding it with discipline.

Are your personal investments also in equity?

For me, it would be a crime to do anything otherwise. I strongly believe that it is one’s dharma to optimize wealth. Even if it is your money, you don’t have a right to ill-treat it. Even in you are temporarily successful in a risky transaction, it will be the root for a permanent failure. Lousy profits are a foundation for future losses. Similarly, putting disproportionate amount of money into fixed income is containing your wealth to poverty.

Are there any pockets of value to invest in for the long term?

There are plenty. For example, the healthcare sector has got some world class companies with superb opportunities in terms of size, strong earnings growth, and yet available at a healthy discount. If India is going to get big, many of the consumer businesses will become huge. Also, no country is going to grow without banks and good finance firms. In India, half the population is still either directly or indirectly into agriculture. Many of the agro and agro-related businesses are going to grow much bigger. There are good companies in capital goods, as the country embarks on serious capitalization and capital formation. With international business growing, export and import logistics will thrive. You will get tired of counting opportunities.

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