When Carry Trades start they do not end so fast & Indian Economic Recovery

Over the last few days as the corrections unfolded in the equity markets globally the predictors of doom came out and started talking about the reversal of the US Dollar Carry trade and that the USD was likely to bounce back sharply over the next few weeks and months which will lead to a huge fall in equities and commodities.

My view on the same is that carry trades when they start, do not end so fast. We are just six to seven months into this carry trade and my guess is that given the state of the US Economy and the fact that there is a huge repair required in the balance sheets of financial institutions, the US Government and the US Consumer we are unlikely to see a reversal of the easy liquidity scenario in the US for a long time. Moreover as I wrote in one of my earlier blogs "Bull in the world of two carry trades" we are today in a world where short term interest rates are likely to remain low both in the US and Japan over the next few months and maybe years and as such there is the potential of money flowing through both the currencies. Since both currencies will typically move in opposite direction relative to other world currencies investors who can make the right calls on when to switch currencies can actually make huge returns by investing in equities and commodities.

Moreover if one analyses the history of Yen carry trade, typically such trades go on for years (with obvious short term reversals in between). As such there does not seem to be much logic of talking about an end to carry trades today.

If one logically also analyses the options before investors today, specifically in the Indian context (which is also valid in the global context)

-fixed income in any form is unlikely to make inflation beating returns for investors,

-real estate on the commercial side is on huge oversupply and on the residential side prices are still not where one can look to make strong returns in the near term,

-gold is something that i like however i expect the Indian rupee to keep on appreciating and thus will take away a large part of the upmove in gold prices,

-commodities look good selectively however given the state of a large part of the global economy we are unlikely to see a big upmove from where we already are.

In this context equity stands out as an asset class which is likely to outperform over the next two years atleast. And given the extremely low short term rates in most large economies there is likely to be a huge influx of money into high growth developing economies.



Indian Economic Recovery


The most positive feature of the current results season has been the extremely positive performance by the Indian Financial sector and the fact that the capital adequacy of the banking sector is almost at all time highs and NPA's on an overall basis have come down for most banks. This in a scenario of extremely strong liquidity will lead to a fall in credit costs for consumers and corporates over the next few months. In a previous article "Do not believe the banks when they say interest rates will go up" I had clearly pointed out that bankers who are talking about interest rates moving up over the next few months and not lending are out of sync with reality. We have seen over the last few weeks almost a rate war starting on the home loan front where one of the private banks has reduced rates to 7.5%. Lot of banks have also reduced auto loan rates very significantly with rates for some of the larger cars coming down to as low as 5% and or most others down to 8%.

The order booking of most capital good and construction companies are seeing a very good momentum and Automobile sales have hit the high gear with most companies reporting more than 15-20% growth for October. Numbers will be good for the next six months due to a low base effect of last year. Similarly Cement sector growth continues to be over 12%, steel companies output is growing more than 20% etc. Higher gas production by reliance and start of production of Crude Oil by Cairn is leading to a high growth in Oil & Gas production. Electricity production is also picking up and likely to move up further next year. The services sector is also seeing a pick up of momentum mainly due to higher government spending. Sectors like construction, banking, aviation, tourism, banking and finance, transportation, trade, real estate etc. are also likely to see a sharp pick up which will lead to a pick up in momentum on the services side of the economy( 60% plus of the Indian economy). Consumer spending has also picked up sharply with most consumer durable and non durable companies reporting strong growth numbers.

The only negative is poor farm sector growth in the Kharif crop which should lead to the overall agricultural growth being a negative of around 6% for current year. However this will lead to a low base for next year and we have seen several times in the past that the year following a bad drought is typically a 8-10% agricultural growth year. Industrial production growth is likely to average around 8-10% next year and services sector growth rate should also be around 8-9%. Taking into account all these factors I believe that next year should be a 8-9% growth rate for the Indian economy.



This combined with strong inflow of foreign flows into India and the fact that economic recovery is likely to be rapid sharp corrections due to global events should be only used as buying opportunities in India.

Successful Investing is anticipating the anticipation of others - John Maynard Keynes

BEARS WHO ARE CALLING FOR A MARKET REVERSAL - DREAM ON

We have seen correction unfold in the equity markets over the last few days after the significant run up seen over the preceding few months.

After reaching a level of around 5200 for the Nifty and 17500 for the Sensex the markets have been correcting over the last few days. The reasons for the same are several which include high valuations, some result disappointments, global cues as well as the RBI Monetary Policy which came out a two days back and was taken negatively specifically for the banking and real estate sectors. The overall impact of the RBI policy ex of these two sectors is not much and as such interest rates are not likely to move up any time soon.

I expect that the current correction which has already seen the markets moving down by around 10% from the top should play out over the next few days. As of today the NIFTY has reached a level of around 4800 and the Sensex is at 16200 levels. I do not expect the markets to fall by more than 4-5% from the current levels and as such the bottom of the markets in the current corrective phase should be around 15800-16,000 for the Sensex and 4650- 4700 for the NIFTY.

The market correction has seen bears come out of their (slightly early) winter hibernation and announcing that the upmove is over for now and we are going to see a very deep correction. This will be driven by the reversal of liquidity flow and a US Dollar bounce back. My view on both these issues are as follows -

The Liquidity Tap - The liquidity tap that has been opened by central bankers all over the world is unlikely to be turned off or slowed down any time soon. Comments coming out of all Western central bankers, the Chinese as well as the RBI is that they still believe that the recovery is fragile and they would like to watch for some more time before taking and significant action. Economic numbers out of Western economies are still mixed with alternate bouts of positive and negative data points. some of the improved numbers is segments like Autos and housing in these economies have been driven by incentives and their sustainability after the incentives run out is still doubtful. Credit flow is still muted and the financial sector is not completely out of the woods. As such the logic of reversal of liquidity as a reason for the markets to fall is untenable at this stage.

US Dollar Bounce Back - Given the fact that the US Dollar has continuously been losing value over the last few months it is only natural that there is a bounce back. All bull markets and bear markets have a bounce back associated with them as nothing moves up or down in a straight line. Technically I believe that the US Dollar Index moving below the 78-80 range is extremely negative for the long term direction of the US Dollar. Even fundamentally the US Dollar remains very overowned. As per the comments of Bill Gross a couple of days back, there is a huge over ownership of US Dollars, specially by China. As such any bounce back would be used as an opportunity for investors to exit/diversify their US Dollar holdings. Even taking into account the long term growth prospects of the US economy vis a vis emerging economies there is no way there can be a directional upswing in the value of the USD. As such a short term upswing in the value of the USD should only be used to buy risky assets.

Overall economic performance continues to be healthy and the economic outlook continues to improve. In bull markets dips should be used to buy into rather than sell into and the current correction provides a good opportunity as the fall in the broader markets has been much more severe than the Indices and lot of stocks are coming at good entry level prices.

Another reason why i do not think that we are likely to have a 20% correction at this stage is that the markets had a prolonged period of consolidation between May and August. Even the subsequent upmove in the markets has not been driven by any euphoria or excessive optimism. As such there should not be a severe sell off in the markets as speculative positions are well controlled. Given that the results season is coming to an end this week most of the market reaction to the results will also get over shortly. Under the circumstances my bet would be on a 10 odd percent correction rather than a 15-20% one. I think we will get a bigger correction sometime next year after a much bigger upswing.

“Its important to grab entry points in bull markets as they come with gaps and are normally short lived”

AFTER THE STORM - THE LULL

After a 100% rally from the March bottoms the markets today look to be wanting to pause. The rally from the March bottoms has been fuelled by a variety of factors which includes an unprecedented flow of cheap money into the global monetary system, the bottoming out of economic performance and a sharp uptick in some countries like India ( Industrial Production up by 10.4% in August), China ( GDP up 8.9% in the last quarter) and stabilization in a number of other economies in the West with the downward spiral getting controlled. Infact inflow into emerging market funds have far exceeded the highs of 2007 and the week ended October 21st 2009 saw an inflow of nearly USD 4.4 billion.

While the initial upmove was fuelled by the avoidance of a Catastrophe the subsequent movements have also been driven by cheap money carry trades of the US Dollar and the Japanese Yen. Valuations that had troughed at around 9-10x earnings have now moved up and the Indian markets are trading at around 18-19x earnings. The BSE Sensex EPS for the current financial year is likely to be in the range of 950 and should move to a level of around 1150 for the financial year 2011.

The current results season has generally been one of positive surprises till date with a vast majority of companies from the Automobiles, Banking, Consumer Goods etc that have reported till date have done better than expectations. Capital good companies have been a mixed bag and a large number of mid cap companies have surprised on the positive, specially on the margins front. Low input prices and carry forward of low cost inventory has helped the cause. For the companies that have reported till date there has been an around 5% sales turnover increase and a 25% profit increase. Performance of commodity companies have been subdued, however are likely to pick up going forward. Pharmaceutical companies have also come out with good results.

The strong uptick in margins due to low input costs are unlikely to sustain as input prices which include most metals, oil, chemicals etc have moved up sharply. Although companies will have some pricing power in light of the improving economy the near record margins that most companies have reported for the current quarter are unlikely to sustain.

The telecom sector has taken a hit due to the intense competition and the investigations launched into Spectrum allocation recently should act as a dampener for the sector in the near term. Although there is not much to lose in these companies as far as valuations are concerned, negative news flow will weigh on the stock performances.

Taking all things into account I believe that we are now entering into a phase of the markets where the news flow as far as the performance of the economy is concerned will keep on improving and the overall momentum in the performance of the corporate sector will continue, however the markets will now need to take a pause and adjust the valuations for the move that has already taken place. As such markets with an underlying positive bias will in all probability remain in a range for a slightly prolonged period of time. Whereas the markets have moved up by nearly 100% over the last one year the next one year is unlikely to see a growth of more than 20% from the current levels.

Given the fundamental outlook on earnings I would say that the lower levels of the markets should be at around 12x 2011E earnings which comes to around 13500 for the BSE Sensex and the upper end could be around 20x 2011E earnings which comes to around 22000. The upper and lower bands in my view are extremes and unlikely to be actually seen over the next 12 months.

So under the circumstances the markets will become stock specific and there will be a huge potential to outperform by having the right portfolio mix. Whereas the last one year has been disastrous for active fund managers due to the momentum up move of the markets as well as the fact that any cash in the portfolio became a big drag ( for example a 10% average cash level in the market that goes up 100% drags performance by 10%). It was very difficult to outperform in the last one year. However going forward a few right picks in a range bound market can really make the portfolio outperform.

I am positive on sectors like automobiles, Oil and Gas and Financials on the large cap side. On the mid cap side of the market Sugar, Auto Ancillaries, construction companies as well as alternate energy companies offer opportunities.

The next one year will be where specific strategies by company managements will become important as the last one year was more of a macro period where initially the market meltdown hit companies in a manner where irrespective of the specific strengths of companies all went down and the last 6-8 months have seen a similar upswing. I personally like ranged markets much more than momentum markets as they do not give time for research and analysis. Companies with better growth strategies and high earnings growth would tend to get greater value in more ranged markets. There is a very high likelihood of a 15-20% correction in the first few months of 2010 and that should provide an excellent entry point for investors who have missed out the first wave. Typically correction in a bull market that we have entered now should not be more severe than this.

I do not think that the prediction of the extreme bulls that we will continue to move up with momentum is likely to fructify.

"We are all wrong so many times that it often amazes me that we can have any conviction at all on the direction of things to come. But we must as in this business you are good if you are right six times out of ten. No one's going to be right 9 times out of 10."

POWER IN INDIA WILL GO THE TELECOM WAY - A BIT EARLIER

Circa 2015/2017, some 5-7 years from today a newspaper headline says - The CERC (Electricity regulator) imposes a Rs 1 rupee floor on the rate of traded power. The supply of power in the spot market far exceeds demand. A majority of new merchant power plants operate at below marginal cost. The cost of power in India falls to the lowest in the world due to intense competition.

Sounds unrealistic, not to me. '

Like the price competition which has grasped the Telecom industry around 6-7 years after it was perceived to be a sunrise industry due to increasing competition and new entrants, a similar phenomenon is likely to repeat in the power sector around 5-7 years from today. The reasons for these are obvious,looking at the short term power rates of Rs 10-14 per unit and cost recovery of power plants based on the cost of power generation and the current merchant power rates each and every industrialist today is looking to get into the power sector. CERC has had to impose a cap on short term power rates in order to prevent short term traded power rates going out of hand.

Lets look at some some statistics. India's installed power base today is around 1,50,000 out of which around 80% would be available capacity, as such electricity consumption should be in the region of 1,10,000 MW. The total addition of power capacity over the last 5 years has not been more than 20,000 MW. As against this the power capacity addition over the next 5-7 years would be over 150,000 MW. A broad composition of the same could be -

NTPC -30,000 MW

NHPC 10,000 MW

SEB's 25,000 MW

Reliance Power 20,000 MW

Tata Power 10,000 MW

JSW Energy 10,000 MW

Jindal Steel & Power 10,000 MW

Sterlite Power 10,000 MW

Adani Power 10,000 MW

GMR 10,000 MW

GVK 10,000 MW

Lanco Infra 10,000 MW

Indiabulls Power 6000 MW

Adani Power 10,000 MW

Other smaller players like Torrent Power, CESC, NLC etc. combined 10,000 MW

Wind Power 15,000 MW

And a number of other players who are getting into the game all the time.

(I do not profess to know the exact capacities being added by these companies but this is just a broad illustration)


And so on and so forth. With a huge amount of capacity coming on stream over a period of 2-3 years Merchant power rates are expected to crash. Power availability will go up and cost will come down. This will be extremely positive from the economies point of view. However it runs the risk of exposing the banking sector to high NPA's from this sector as Power Plants are getting Financial Closures very easily these days based on rosy projections of price of power sold and expected profits from the same. The total investment going into setting up power plants by the private sector is likely to be in the region of USD 100 BILLION over the next 5-7 years.
Also given the acute shortage of power in India today with a large part of the country having to go with 6-8 hours of power cuts every day a number of companies are today looking at adding their own captive power plants, this is likely to further add to capacity. It will be difficult for the cost of power production to go below Rs 2 per unit. As such cost recovery will become an issue for a large number of new power plants. Given the huge fixed costs involved in setting up power plants most of these plants will be forced to run on marginal costing just to cover their fixed costs.
As such investing in the power generating sector in India with a view towards a few years into the future is froth with danger. The ROCE for most of these projects is unlikely to go into double digits.

"Sometime your best investments are the ones that you do not make"

Indian Rupee Looks to appreciate big time

As I had written in one of my previous articles titled "Is it time to go underweight on technology" I believe that the Indian Rupee is looking to appreciate significantly over the US dollar over the next few months. It has already appreciated by nearly 5% over the last one month itself.

Over the last few months the India rupee has remained week against the US Dollar and has underperformed most of the other emerging market currencies by a wide margin. The Indian rupee still trades at around Rs 47 to the dollar vis a vis its lows of Rs 39 to the dollar in the first quarter of 2008. As against and appreciation of just around 6-7% of the rupee the Korean Won ahas appreciated by 25% plus in the same time, The Indonesian Rupiah by nearly 30% and the Brazilian Real by nearly 35% etc.

I believe that the Indian rupee which has been reasonably stable in a scenario where the US Dollar has continuously lost value against most currencies and the US Dollar Index is down 15% from its peak of mid March 2009 is set to begin an appreciation cycle which should average 4-5% (at least) per year over the next two years. The reasons why the rupee has not appreciated in the near term despite an inflow of USD 12 billion in portfolio flows since March,continuously falling trade deficit, strong equity fund raising, strong remittances flow etc has largely ( in my view) due to RBI keeping a tight leash on the Rupee due to the pressure on export industries which have been severely hit by the global slowdown. Also given the fact that inflation has been on a negative territory there was no incentive to let the rupee appreciate in order to control inflation.
Going forward given the fact that inflows into India are likely to remain strong and also the fact that inflation is likely to pick up over the next few months there is an increased likelihood that the RBI will let go of the rupee and we will see a steady appreciation. This will also be supported by an overall recovery in the global economy which is already leading to some sort of uptick in exports of traditional labour intensive products.
We have also recently heard of lot of noise coming from the Indian Government as well as RBI on the need to control inflation and the fact that India might be among the first few countries to abandon the easy monetary policy. This is also likely to be a self fulling prophesy for the appreciation of the Rupee as most of the Western Central banks have clearly indicated that they are likely to keep rates low for a prolonged period of time. Just the expectation of rate hike will lead to rupee appreciation.

That was the fundamental view. Even technically the USD has made a very negative pattern against the Rupee both on the weekly and daily charts. Whereas on the daily charts it has made a double top on weekly charts it is on the verge of completing a head and shoulder pattern that should result in the rupee moving to a level of Rs 44.5-45.25 by March 2010.

I believe that the appreciation of the rupee will be positive for the economy as it will reduce inflationary pressures to an extent and also reduce costs of both inputs as well as borrowing for India Inc. However it might hurt some export industries as a fast appreciation of around 10% will be difficult to adjust given that external demand is still pretty week.

"Faith in your own abilities and confidence in your individual methods are essential to success"

India is not Japan in 1990, maybe more like Japan in 1974

I have been reading lot of commentaries which suggest that the boom in the markets that we saw in the period 2003-2007 was similar to the Japanese markets upmove in the decade of the 1980's and the fact that markets are likely to remain in a range, either sideways or with a downward bias for a long period of time and that the peak of the markets seen in early 2008 is going to be a peak for a long period of time. Such comments mainly come out of people who were extremely bearish in March/April 2009 and were predicting the Sensex to fall to 6000 levels.

I do not believe in this theory and my view is that the move in the Indian markets over this period actually was similar to the first upmove in the Japanese markets from the mid 1960's to 1973 where the markets went up by four times in a period of around five years and then corrected over the next 12-15 months. The reason is that, that was the time when the Japanese markets were recognized as a sustainable long term growth story and most investors realized that this would be the growth market for the next two decades. After the destruction of the Japanese economy in World War II the early years were spent in regaining the momentum. By the mid 1960's there was a new type of industrial revolution in Japan where the Japanese started moving towards becoming world class in a number of industries including Automobiles, Ships, Machine tools etc. This was the time when value addition improved and the composition of the GDP started changing with retail, finance, real estate and other services industries picked up. This is very similar to what we saw in the period of 2003-07 in India.

Subsequently came the period from early 1973 to 1974 where due to the oil shock and rising inflation there was a slowdown and high inflation. This is similar to the crash we saw from the early part of 2008 to March 2009 in India where this time it was the Financial Crisis which caused the market sell off.

This phase led to the start of a more dynamic growth phase with improvements in productivity and headway was made investments in several other new growth industries like consumer electronics, computers etc. The Japanese economy continued to grow strongly till the late 1970's despite lot of challenges related to the global economy. I believe that the Indian economy driven by investments in Infrastructure, a strong domestic consumption story as well as a rapid expansion in services industries is set to grow at a rate of 8-10% over the next decade. India is today getting recognized and identified as a hub for small car manufacturing. This growth rate should lead to a sustained bull market in India over this time period where this kind of growth will be something that is very rare in a world economy that is struggling to grow post the financial crisis. Although the Oil crisis of the 1970's is different from the Financial Crisis of 2008, it is similar in its shock and awe value.

Even before the Japanese markets blew off in 1982, the markets had moved by by nearly three times from its bottom of 1974. From the 1974 bottom the Japanese markets went by by more than 10 times by 1990.

At the risk of repetition I will again quote some points from my WAVE theory as to the reasons for the impending boom and the overall direction of the markets.

I believe that given the state of the global economy, specifically the USA, Europe and Japan nearly 50% of the global economy is not likely to participate in the next big up move. USA and Europe have big structural issues with their economies and their financial institutions are totally in shatters. It will take years to repair these institutions and encourage them to take the risks required to provide capital to the economy. The saving rates in these countries are abysmally low and with increasing unemployment and pressure on wages this would not increase significantly. Also given the fact that a large part of these economies are driven by consumption, given a combination of the above factors consumption is likely to remain very muted for the foreseeable future. The governments of these countries will be able to pump prime these economies through fiscal measures in the short run, however over a period of 5-10 years these economies are unlikely to grow at an average rate of above 2%. Infact the averages will be between 0-2%. In order to pay back the huge borrowings due to fiscal spending these governments will have to reduce spending and increase taxes eventually, which will again become a drag for these economies.

However this will be a period in which India specifically should stand out and show very aggressive growth. Given a combination of political stability, high saving rate, high capital flows, a strong financial system and huge investments in infrastructure development the economy will go back to a growth of 8-10% very very fast.

–As the huge deluge of dollars searches for returns and as the dual carry trade plays out we will see most developing countries with a potential for generating reasonable returns getting huge inflows both as portfolio flows and FDI.

-This will also be a period in which growth will happen with muted inflation and low interest rates. The reason why inflation will not pick up is that more than 50% of the global economy will hardly see any growth over the next five years and as such demand pressures will be low. This will resulted in commodity prices remaining suppressed (not withstanding the current rally backed by dollar weakness and expectations of economic recovery). Moreover the investments that have happened in capacity expansion over the last few years have led to an overcapacity in lot of commodity industries which is unlikely to correct in the near term

-External borrowings will remain cheap with the dollar LIBOR rates at all time low levels. Eventually the spreads on borrowings will also compress.

-Fiscal deficit which is pointed out as a concern will not be a concern for fast growing economies like India as repayment of these borrowings will be easy due to high tax collections growth due to strong economic growth and increasing tax compliance. Over a period of the next 5-10 years the country ratings of India by global rating agencies will also move up as most Western countries get downgraded.

-Given the fact that most corporates have come out of the current crisis without too much damage to their balance sheets (despite the currency derivatives and FCCB issues). Most Convertible Bonds are also likely to convert now, given the rally in stock prices.

–the financial system has not seen a huge up tick in NPAs the investment cycle should remain strong. As the economy starts to recover and confidence comes back consumption demand will also revive very strongly.

Having learnt from the mistakes of the past corporates, individuals and the government will drive towards productivity and better delivery. Over the next two years India will see a huge increase in domestic oil and gas production which will reduce import dependence and provide a fillip to lot of consumption industries.

-A large number of private and public sector driven power plants will get commissioned over the next three years which will lead to a strong growth in electricity production and reduce power deficits drastically. This will also lead to a fall in the abnormally high merchant power rates that we see today.

-An increased emphasis on the roads sector will see the highway projects again falling back in place after virtually no development on this front over the last five years. There will be large investments going into various kinds of low cost and mass housing projects which will have a huge multiplier effect on employment as well as the consumption of key inputs like cement, steel etc. Lower consumer credit rates will lead to a strong revival in demand for consumer durables, which is something that we are already seeing.

-Unlike in Western economies where companies are being nationalized the Indian government is in an envious position where it can raise Rs 50000 crores every year with just small disinvestments of a few PSU’s. These resources can again be used for spending by the government in all its key projects.

I believe that the pace of up move in the markets in WAVE over the next few years will very strong and fast and the Indian markets should double from the current levels over the next three years.

The big bubble upmove that started in Japan in the decade of the 1980's to end in 1990 is still a long way off and I believe that predictors of doomsday are jumping the gun atleast 15 years too early.

"The four most dangerous words in investment are 'This time its different'" - John Templeton

The perils of selling early

Back from a three day vacation at Udaipur. Excellent place and very relaxing. Happy Dussehra to all readers of the blog. May good prevail over evil Just penning down some thoughts on investing and not about the markets this time.

Identification of stocks that can outperform the markets significantly and generate a huge amount of alpha for the portfolio takes lot of time and effort. Out of 4-5 high conviction ideas there are just 1-2 which will do very well. As such selling of such ideas too early normally leads to subnormal results. Although i have always believed in holding stocks for a long time and riding the entire wave ( I belong to the pre hedge fund era) today the markets have become more about flip trades where most investors are not willing to hold on for too long and cash out too early.
The risks of selling out early out of strong conviction ideas that were bought at very cheap valuations is that the probability of making a suboptimal choice in buying into newer companies is much greater. I believe that the thing to remember is that that most of the money is made during the overshooting phase of the stock where the stock price moves above fair value and most money is made in buying stocks when they undershoot way below fair value. The dilemma that most fund managers like me face who end up buying stocks way below fair value and at an early growth stage of the company is that as the stock approaches fair value, one has already made a lot of money and when other investors are recognizing value in the stock we would already be well in money and as such would be looking to book profits in the stock when it is actually time to ride the wave. This is also borne out of an insecurity about protecting the outperformance and preventing downside risks.

I will explain this through a recent example where i have been guilty of cashing out at fair value and missing the upside -

In recent times a big multibagger that I picked out in my last assignment in was MPHASIS. This was a stock which was going to be a clear beneficiary post takeover by HP and was likely to see huge business traction over the next few years. However this stock was valued at 20% the valuation of large Indian IT companies. I picked up big quantities of this stock in the price range of 150-170 and held on for a long time where the stock did not move much. My view was that eventually the valuations of this company will converge towards that of the large cap names in the sector. However as the results started to come and other investors realized the potential in the company the stock which I left as the top holding in one of the funds I was handling shot up by nearly 250% in a period of just six months. I could capture some part of this gain for my investors in the existing PMS also but at a much higher price of Rs 330. Even from there the stock went up by nearly 60% in just around 2 months time. As the stock moved up by nearly 60% where the markets remained more or less flat and given the fact that this stock was the top holding in the portfolios I got tempted to book profits at at time when most other investors were just buying into the stock. As a result I lost out the overshooting upmove from Rs 520-530 levels to the current Rs 650 levels.

Now I will give an example of patient investing ( which is what i usually like to do). Back in the year 2000 when i used to work with SBI Mutual Fund, Pantaloon Retail was a very small company and organized retail was just about establishing itself in India. At that time I was really impressed with the vision of the management and I could also see that there is such a huge market place available for the company to grow as growth could be endless atleast of two decades. At that time the company wanted to raise some equity and I looked at it as an excellent opportunity for buying into a high growth concept stock at par value of Rs 10 per share. After we bought into the stock the markets went into a bear hug and although the company continued to grow the stock price remained at around Rs 10 for a period of nearly three long year. Subsequently as the markets recovered in the year 2003, the stock price zoomed by by over ten times in just one year and by 100 times over the course of the following bull market and even today after all the corrections and up moves in the years 2008 and 2009 trades at well over 50-60 times of the initial purchase point.

I believe that the markets as they are positioned in India today provide lot of such opportunities of long term investing into high growth mid cap companies that will multiply in value over the next five years. However it requires patient investing on the part of both investors and fund managers who manager investor funds. The idea should be ride out the entire growth story without bothering about short term underperformance. As one famous investor has said "The fear of underperformance by fund managers is worse that underperformance itself". Essentially the fear of underperforming leads to underperformance.

"To make big money in the stock markets it is important to put yourself in the place of the management of the company and see things from both their and ones own point of view"