Lynch guide to Indian Stocks-2

Coming back from my Earlier post regarding "Lynch's guide to Indian Stocks", I have missed something that Mr. Lynch always told that just because stock has gained in price does not mean that the stock is expensive and is not a reason of not investing, and vice-versa. He advised to look into Walmart stock (WMT), where the stock has generated promising returns for its shareholders y/y consistently.

I had assumed that after PE fund invest in the company, they reap major benefits than the shareholders who have participated in an IPO. I have been proven wrong by this scenario.

Take an example of Bharti Airtel Ltd.
-Warburg Pincus had invested $292M in 1999 for ~19% stake, and exiting from the investment in 2005 at $1616M, making cool profit of 5.5 times in the span of 5-6 years, which is damn good

-Now enter the retail long-term shareholders at Rs.45 via IPO at P/BV of ~2 (the company was not making profit during that time). If the investor had tremendous faith in the fundamentals and had stick around with the company for another 6 years (same as the PE fellow), then the CMP of ~534 as on Oct08, when the markets crashed to the new lows, the stock would have generated staggering return of 12 times-more than Warburg Pincus returns.

Of course this is a hind sight bias, but I have to admit my original these is incorrect and Mr. Lynch is 100% right for this part.

Emperor's New Clothes...

Emperor's New Clothes...

Come a rally, all the analysts in the market are saying that its a bear rally, some have even gone ahead to say that the worst is over. So I am just pondering over the analysts calls. Most of the analyst have specialized knowledge in particular domain, lets say, a Pharma analyst. He has to do the most important thing of keeping tabs of the pharma companies he is covering, and from this he gazes into a crystal ball to predict the earnings. I can understand if the prediction levels are generalized but basically all the analyst will try to predict each line-item in the financial statements and then come up with the target price using some of the most sophisticated valuation tool-THE DCF. If you aspire to become an analyst some time in the future, you have to learn the DCF modeling, only then you may treat yourself as an analyst. Coming back to my story of predicting earnings, isnt it futile to predict earnings as its a pretty difficult exercise to do.

Graham insisted to choose "precaution" than "prediction". But then who wants to follow simple techniques, rather analyst try to challenge their intellect by predicting the earnings. To make the matter worst, they try to predict changes in the earnings quarter by quarter, and the statistics tells us that analyst forecast is nothing more than throwing darts blindly. Good analysts try to forsee the company in the ways that even the layman will understand. They see the companies growth by building the decision trees; what is the probability that the company will grow earnings at x% or y%. If the odds provide favorable margin of safety, they will recommend the stock despite the growth rates being below the analysts estimates. And to be frank majority of the analysts know that their forecasting abilities are nothing more than throwing some intelligent numbers, but who will say that the emperor is wearing nothing!!!