Chairman’s Speak

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Mr. Raamdeo Agrawal - Chairman, Motilal Oswal AMC

Mr. Raamdeo Agrawal

Motilal Oswal Asset Management - Buy Right Sit Tight Insight - February 2016

Dear investor friends,
I am pleased to present the third edition of our “Buy Right Sit Tight Insights”. Through this series, we will share with you our investment insights and other ideas which we believe are relevant to the world of equity investing.

In the first two editions (July 2015 and October 2015), we covered some aspects of our investment philosophy – QGLP (Quality, Growth, Longevity, at reasonable Price). In this edition, we touch upon the issue of rationality of markets over time.

Equity markets – Don’t rationalize the irrational

It is said that most equity investors know the price of everything but the value of nothing. The markets are obsessed with price. In the short-term, price is determined by marginal opinion. As John Burr Williams in his book The Theory of Investment Value says, “Today’s opinion will make today’s price, tomorrow’s opinion, tomorrow’s price!”Today, world over, rapid changes in opinion lead to rapid changes in price. One key reason for rapid opinion change (hence price change) is global integration of economies and markets. Take India for instance. Here, we have –
Low import tariffs, leading to landed-cost dollar pricing for many products
Limited capital account controls, leading to free inflow and outflow of FII and FDI monies
Real-time global news flow, thanks to the internet.

These factors combine in various ways to keep creating short-term noise, influencing short-term stock prices. However, the underlying businesses that these stocks represent are not that volatile. Their value changes at a price which is unaffected by short-term noise and more influenced by longer term fundamentals such as –
Quality of business – competitive landscape, return on investment, etc
Quality of management
Growth in medium- and long-term earnings.

Example of short-term noise v/s long-term fundamentals

Consider the BSE Sensex. Over 20 years 1995-2015, the standard deviation of annual price change is a high 33%.
However, standard deviation of earnings change is much lower at 15%. What is most interesting is that the 20-years CAGR of Sensex at 11% is exactly the same as 20-years Sensex EPS CAGR!

Key inference of the above
Equity markets tend to be highly irrational in the short-term but fairly rational in the long-term. So, investors are advised NOT to rationalize the short-term irrational prices of stocks, but instead, focus on the long-term rational value that their underlying businesses deserve.

Winner in equity markets = Strong emotional construct + Time-tested investment philosophy

Warren Buffett has said, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” Thus, in equity markets, winners will be those with a strong emotional construct, especially when managing public money.

A strong emotional construct will need to be complemented by a time-tested investment philosophy, a simple and clear investing process, and most important, courage and discipline to practice the philosophy/process through vagaries of the market.

In conclusion
The above discussion is aptly captured by Benjamin Graham in The Intelligent Investor, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Going forward, short-term irrationality may go to extreme levels. As investors, we must capitalize on these opportunities. We have to sharpen our techniques not only to buy right, but also to sell stocks at irrational extremes.

I welcome your feedback and suggestions for improvement. Please email the same to

Raamdeo Agrawal



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