Wednesday, February 28, 2024


The latest missive from the Old Man of Nebraska talks about how the stock markets are becoming more and more like a casino.


Old Man, as always, is right. It pays to listen to Old Man Buffett. 

My thoughts on why this is happening: 

If you apply the logical  DCF methodology to stock picking - pick any Nifty or Sensex stock - you will most likely end up concluding that the stock is overpriced, however optimistic your assumptions. 

At the core, investment is all about buying assets at lower than their "intrinsic" value. 

Intrinsic value is the discounted value of expected future cash flows, discounted at a rate appropriate to the risk profile of the particular stock. On which value you give a margin of safety. That, in summary, is the Benjamin Graham approach. Benjamin Graham was Buffet's professor and teacher. 

Buffett and Munger added their own insights on what a "good company" looks like. Just a few parameters, which all investment gurus will agree to, are: 

 1. Adequate "moats " like brand strength, pricing power, independence from regulatory interference, patent protections, distribution strength... A moat is anything that enables the company to sustain its competitive advantage for the foreseeable future. 

2. Pricing power
3. A business that is not easily comoditisable or capable of being swamped by "china imports" 
4. Growth prospects of the industry in which the company operates. For example, with the rise of disintermediation and alternate financing options, pure play credit card companies may not be a good bet today 
5. Management with long term vision
6. Good ROE and ROCE
7. Low Capex needs
8. High replication possibility at close to zero cost 
9. Consistent sales and profit growth 
10.  Something in the DNA that will make the Company  extract a greater premium from its customers over a sustained period of time 
Etc etc 

But are the markets purely driven by fundamentals? The logical fundamental investor certainly hopes so, but that is less and less the case.

As more and more people enter the market, and as stock trading becomes easier than buying groceries with 15 minute deliveries, the market, to use the term introduced I think by Soros, becomes more and more "reflexive", finally adhering to the financial equivalent of the definition of a Socialite, a person who is famous because she is famous. The stock price goes up because it is going up and everyone expects it to go up, and the reverse on the way down.

Whatever the trendline may be, prices yo yo wildly around it. Computerised algorithmic trading, now aided by AI and machine learning algorithms, magnify this tendency a hundred fold. 

Add to this cross border money flows searching for cross country arbitrage, and the availability of easy money due to extreme monetary "easing" policies, and it becomes a perfect madhouse.

Sense and logic,  where art thou, cries the fundamental investor, as he looks on with bewilderment. Stock prices seem to have a mind of their own - and they do, it is an independent mind beyond human control driven by algorithms- and all ups and downs are much faster and extremely magnified. 

In such a situation, sticking to fundamentals alone may not be the right strategy. At the very least, for a long only investor, setting a strict stop loss when entering any stock is absolutely mandatory. 

And the old old adage of Buffett, I don't care if I don't see the market for a year, for I have picked fundamentally good stocks, may no longer hold true. If like Buffett, you decide to retire to the metaphorical hills of Omaha, Nebraska, and come down to the plains only once a year to check on your stocks, you are likely to find, like Rip Van Winkle did, that the world has left you behind and moved on in your absence, leaving you with nothing.

Can you catch the trend? 
Can you Intuit the future? 
Can you second guess the crowd? 
All while being dependent on them! 

Can you get in before them,
Can you bale out in time? 
Do you have balls of Steel,
And a heart that is as strong? 

For those are the qualities needed,
In today's crazy world,
To succeed in the markets,

Or for that matter,

In anything at all! 

( Posted to my blog 

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