Fear of being left out…an investor dilemma

I am a value driven fundamental investor…not that I invest with 3-5 years of horizon, but for at with least 1-2 years. My principle investment criteria are a good company with strong management, good (if not unique) business model, good visible growth available at reasonable valuations…. a typical textbook investment strategy.

Company which has its tangible operating model and execution capability in place rather than promised…..

So I started with investing in A and B1 listed companies like Tata Motors, Ranbaxy, ITC, Corporation Bank, Bharti Airtel, Infosys, …all companies have good investment rationale which sufficed my investment criteria. My portfolio PE was around 18-20x, PBV was around 4x…fairly inline with the broader benchmark. All companies have had their positives and negatives…but are at least sound.

Surprisingly my portfolio underperformed….grossly! My portfolio became a matter of ridicule. How come you have ITC in your portfolio…a friend giggled at me. I said good company…good management…blah blah. My friend did not buy my thoughts. Mind it, it is the same company on which lot of reports circulated in 2006 justifying its price target of Rs 300!!!

These stocks have grossly underperformed the benchmark by 20-60% during last 12 months! Is this underperformance warranted?

Agreed that these companies had problem of their own, Tata Motors being led down by higher interest rate. Ranbaxy being harassed by overseas litigation. ITC due to negative impact of higher tax/duty on cigarette and Infosys because of currency appreciation. Bharti Airtel being led down by the fear of higher competition and litigation over spectrum. Are their results that bad because of these factors?

Has competition ever led Bharti down? Yes once, during RCom launch in the 1st half of 2003, but since then it not only regained its market share but increased it too in 5-6 large players dominated Indian market (unlike 3-4 large players dominated developed market elsewhere in Europe/ the US…or 2-3 in Latin America, Russia and China!!)

[Are currently favoured companies like REL, JP Associates, DLF, HDIL, RCOM, and many more- free of litigation or impending risk?]

Anyways, despite these short term problems, is this underperformance justified?

What if their management are not making aggressive presentation? What if they are not making any vocal public statement about their growth? Are Tendulkar and Dravid less aggressive than likes of Yuvraj and Sreeshant, just because they lack aggressive facial aggression and reply to the opponent by their sturdy performances?

What if management are not publicly marketing their company rather are focussed on developing their own product. How many companies in India have global media and analysts' coverage of their product like Tata's Nano have? I guess none. Promise is a promise…that's what Mr. Tata said, despite raw material cost being risen by 40-50% since the 1st announcement of INR 100,000 pricing of this small toy!!

If a company has made inroads into the US market in 1980s, when Indians were regarded as typical Blue Collared employees in the US, how can we write off those companies when one year they had a hit just due to systematic factor, while their operations are as robust as ever!

However, my all these arguments just went into my office bin, and the other day was thrown outside by the office boy! And as a desi marketing lingo says " Jo Dikhta hai, wo bikta hai" (One which is visible and marketed well are sold)

Not surprisingly, my portfolio underperformed. In this news driven frenzy bull market value driven contra calls did not work. That's why UTI Contra Fund performed so badly in the entire bull-run since its launch, till Q3 CY07. Only after a bit of restructuring of its portfolio, it delivered good returns in Q4 CY07.

Why now? Because its current top 10 holding includes 8 Consensus Buys/ Mostly Buys/ Favored stocks (REL, Tata Power, Union Bank, PNB, ICICI, BHEL, Bharti, Siemens other 2 are Vardhman Textiles and Welspun India)

While other Contra fund: SBI Contra Fund performed well throughout last 12 months (and earlier also) because 6-7 out of top 10 holdings are Consensus Buys/ Mostly Buys/ Favored stocks (JP Associates, RIL, SBI, Tata Steel, BHEL, Sintex, Crompton Greaves, others are M&M, Infosys and Welspun Gujarat)

Then I questioned myself, are these really contra theme based funds or because of "The fear of being left out" they have adopted bull-run favoured strategy (If you cant beat them, join them!)

Then I thought to diversify away from value only stocks and to chase few aggressive news driven stocks in my portfolio…I bought IFCI, HCC, JP Associates, REL etc. My portfolio delivered good result. And like Twenty-20 Cricket match-I enjoyed sudden outperformance. People who ridiculed at me earlier (due to my Test Match approach) now started praising me. This bull-run turned me from a value investor to a market oriented aggressive investor. Why not? 2007 was the year of Twenty-20 and not Test Match which tests 5 days endurance rather than T-20s 3 hours glamorous grit.

…and then I applied for the Reliance Power IPO, so that I am not again a matter of ridicule in my professional network.

I am defining my identity again…or rather searching for it…! From a test match lover, I have become T-20 connoisseur.

But with India winning the Perth test and Sensex down by 10% from recent highs…I questioned myself throughout this weekend…Would I favour T-20 to Test Match forever???


-----------------------------------------------A Confused Investor-----20th Jan 2008-----