India has become "flavor of the month" for investors. Once I saw India on the cover of Business Week as the Next Great Market, I said "Uh-oh, now the money is really going to flood in". This is exactly what has happened over the past year and the market has rewarded those investors by seemingly scaling a new high every month or so. But, as those of you with experience investing in emerging markets know, the party ends at some point and usually ends badly. Here are a few thoughts on how to approach investing in India at these levels: - Take a long term view. An amazing statistic is that the majority of trades in India are day-trades. Taking a one day or even one year view can be dangerous when markets have moved up sharply as they have in India the past couple of years. You are best off taking a 3-5 year view on investments you make in India, whether in individual stocks or in fund managers (like us and others).
- Avoid stop losses and price targets. Investing blindly with price targets or stop losses is, in my humble opinion, a foolish way to invest. Instead, you should focus on the fundamentals of the companies in which you have invested and focus in particular on the long-term strategy and on the management depth of the companies. This will help you build the conviction to continue to buys shares when the stock is down 50% and when the stock is up 100%. Remember that in a growth market like India, the best companies will return many times your investment if you have the patience to hold on through the volatility.
- Invest within your circle of competence. Don't invest in a company simply because you hear a rumor about it, or because your cousin in Delhi has invested in it, or because you think the company has "buzz". Instead, invest in areas you understand and do your own due diligence on the company. If you aren't able to do this, particularly while living here in the U.S., then invest in a manager who can a large presence in India and can do this kind of detailed due diligence.
- Invest in companies with the most scalable management teams. This is obviously a truism, but success for most companies boils down to management execution. This, in turn, is a function of their scalability, span of control, and philosophy around decision-making. Focus more on the management than on the product/service offering when evaluating the company. As we used to say in the venture capital industry, "a great CEO will take a mediocre business and turn it into a great business, while a mediocre CEO will turn a great business into an awful business".
- Focus on management integrity and on how well management will treat minority shareholders. In India, you are most often going to be investing with companies that are effectively controlled and perhaps managed by individual families. Because of this, you need to develop a view about how this management will treat minority shareholders. Use past corporate actions as a guide.
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- By Gautam Prakash
- Photo courtesy: Jane M Sawyer
1 comment:
This is very useful advice. The Indian market is still immature with respect to rumours and "buzz". In my humble opinion, the investors need to look at funds that spread out the risk over multiple stocks or do extensive research on the stock they are looking to buy. In my blog (http://wisezen.blogspot.com), I have outlined a strategy for US-based investors who are interested in taking advantage of India's resurgence.
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