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Grazing at the edge in investing  

By Tensing Rodrigues*

Ralph Wanger,  the iconoclastic head of the Acorn Fund, is not only one of the most popular asset manager but also the author of the smart but irreverent book, ‘Zebra in Lion Country.’He compares investors to a herd of zebras. Those who graze in the centre of the herd get far less grass than those who graze on the flanks as the grass in the centre has been already trampled upon and eaten away. While those on the edge get the fresh grass. But are exposed to the lions. This, according to Wanger, is the fundamental truth of investing. The need to seek the difficult balance between the return and the risk.

He exemplifies his nuggets of stock picking wisdom with unusually witty analogies and metaphors. Take the case of choosing between ‘favourite’ companies and ‘out-of favour’ companies, for instance. He says it is like twenty guys going to the same chic bar every weekend looking to “get lucky” with the best woman in the room. But the problem is, as they all make their moves, they form a wall of drunk men around this one woman. Inevitably, she wants nothing to do with any of them. “But”, says Wanger, “a guy probably has a better chance of finding someone he could share his whole life with at the library than at a crowded bar with tons of competition”. Moral of the story: if you are looking for serious profit, look beyond the ‘hot’ companies.

Gautam Baid, a portfolio manager at Utah-based Summit Global Investments, is fascinated by the ‘pricing power’ of a company – a low-profile, apparently lazy company that is content with what it is earning. It has a competitive advantage in the market, and could have easily raised its prices without affecting the demand for its products; and raked in much higher profits. According to Baid,  that is going to happen someday or the other. So buy stake in the company before it happens.

How do you evaluate bad news in the market ? Carl Icahn is a hedge fund manager and one of the world’s richest men. He buys stake in companies that nobody else is interested in,  the companies whose stock prices reflect a poor P/E ratio and whose book values exceed market valuation. He acquires controlling stake in them and then turns them around. Much more than shareholder activism, it is about the hawk’s eye for value – identifying value in market battered companies.

Though it is not the best example, the case of three large banks in India illustrates the worth of a subtle eye for value that lies hidden behind the public scorn. The three banks I am talking about are State Bank of India, HDFC Bank and ICICI Bank; while the market has idolized the middle one, it has beaten down the stock prices of the other two.

HDFC Bank definitely has immense value but at what price are you buying it ? As against this the other two are available at rock bottom price. For the moment keep aside the question of value. What is your downside risk in the stocks of State Bank of India and ICICI Bank? Now look at the value that you are getting at that price. State Bank, for instance, has a lot of value locked up in its physical assets, its distribution network and its ‘goodwill’ – the small woman in the small village is a loyal customer of the bank, blissfully unaware of the NPAs and the book losses.

Now some good news for the young doctors and engineers in Goa who would like to capture the value in the emerging industry of bio-medical engineering. A team of multi-disciplinary professionals based in Bengaluru, who are enthusiastic about bringing innovative healthcare technology and medical devices specifically to meet India’s needs, have been conducting Bio-Design Process Hackathons across the country.

Bio-Design Process is a framework designed and tested by Stanford Byers Center for Biodesign for determining business models in the healthcare domain – especially medical devices. Hackathon brings together participants from various fields to develop innovative ideas to solve the unmet healthcare needs in India. Those interested please contact the Bio-Design Process team at rohaniandsouza@gmail.com or darsav@gmail.com.

* The author is an investment consultant. Readers can send their comments and queries to investment.ideas.shop@gmail.com

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