When the global equity markets crashed in 2008 following the Lehman collapse Warren Buffett wrote an Op-Ed in a leading national daily in US, New York Times with the title “Buy American, I Am”. He wrote this on October 16, 2008 when Dow and S&P hit a decade low with an advice to buy. While the indices continued to drop further for the next few months, they delivered more than 50 per cent returns over the next 2 years. Had Buffet been investing in the Indian equities market, this is probably what he would have written today.
The equity markets are once again in a mess, both in India and abroad. " The problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, investment activity will falter, businesses will struggle and the headlines will continue to be scary."
So… I have been buying Indian stocks. This is my personal account I'm talking about, in which I previously owned nothing but Government bonds. If prices keep looking attractive, my portfolio will soon be 100 per cent in equities.
"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread and is gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions." However, fears regarding the long-term prospects of India's leading business enterprises which have great fundamentals make little sense. These businesses will indeed suffer earnings hiccups, as they always have. "But most major companies will be en route to setting new profit records - 5, 10, 20 years from now."
"Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher a month-or a year-from now. What is likely, however, is that the markets will move higher, perhaps substantially so, well before either the sentiment or the economy turns up. So if you wait for robins, spring will be over."
A little anecdote from history: In 1991, after successive governments of Rajiv Gandhi, VP Singh and Chandrasekar fell; a financial chaos set in coupled with a cascading downward economic spiral precipitated by the Gulf war, resulting in swelling of oil import bills and decline in exports. With forex reserves of $1.2 billion – barely good for three weeks of imports and a likely default in foreign exchange looming large – Yashwant Sinha, the then finance minister, few weeks before the government fell cleared the pledge of gold to raise $600 million to honour the country's financial obligations. This crisis created an opportunity for an economist finance minister (Dr Manmohan Singh) and the equity markets rebounded, delivering above 25 per cent annually over the successive three years despite the Harshad Mehta scam.
"In short, bad news is an investor's best friend. It lets you buy a slice of India's future at a marked down price. Over the long term, the stock market news will be positive. "
During the last 20 years, bank deposits have delivered less than 10 per cent yearly return. A capital investment of Rs 1,000 with an annual return of 10 per cent would have become Rs 6,700 without any volatility or down years. But the same investment in the Sensex would have become Rs 23,100.
One might think it would have been impossible for an investor to lose money during the last two decades which were marked by such extra ordinary gains. But some investors did. " The hapless ones bought stocks only when they found comfort in doing so and then proceeded to sell when the headlines made them queasy. Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that the Government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts."
If Sensex closes December 31, 2011 at same levels as it closed the week (sub 15,800 levels), calendar year of 2011 will become second worst year for equities over the last 20 years of India's open economy. We all know 2008 was the worst year and that the subsequent years return was above 80 per cent. Over the last four years, since 2008, the Sensex has delivered negative returns of 22 per cent when the underlying companies have grown 40 per cent in earnings and 60 per cent in book value. We all know stock prices grow as much as business earnings of the company over the long term.
"Equities will almost certainly outperform debt over the next decade, probably by a substantial degree. Those investors who cling now to debt are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: “I skate to where the puck is going to be, not to where it has been”
I don't like to opine on the stock market and again I emphasise that I have no idea what the market will do in the short-term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was”. Today my money and my mouth both say equities.
(The author is Executive Director at Unifi Capital. The views expressed here personal. The sentences in italics are extracted from Warren Buffett’s letter published in NYT on October 16, 2008.)