For investors, “Who Doesn’t Know That” must be the first question

Few years ago, Howard Marks' son advised him to invest in Ford because they were coming out with great new products. Howard Marks replied, “Who doesn't know that!”

This question of “Who Doesn’t Know That” is very powerful. It forces us to think that if everyone knows that then isn’t it already in the stock price?

Information travels faster than light these days. And it’s especially true in Stock Market. We often come across these stories and themes in newspapers and Media. It goes like this, the Govt has declared

Housing For All; BUY Housing Finance Cos

Strong Defence Budget; BUY BEL/BEML

10KM of Roads everyday; BUY L&T

Then there are other themes,

“Unorganised is shifting to Organised”, BUY despite high valuation too

“NBFCs are taking market share away from PSBs”, BUY NBFCs.

So all we have to do is, ask “Who Doesn’t Know That?”

To this question, we have often realized that even our neighbour who has started investing last year happens to know such news. So there is barely any upside left since all those who know have already bought it.

Someone has rightly said, “If it is in the news, it’s in the price.”

For making money, we have to be the first one to know something and buy it when nobody is buying. We have to look into the pockets where there are temporary problems and stock prices are already cheap and negatives are priced in. We are basically buying from couple of fearful people who are thinking stocks could go down further in short term. Since we are long term investors, we do not mind buying it from them and see temporary losses but good gains over long term.

At MoneyWorks4me, we follow this strategy for long time. Let us share few recent case studies.

Housing Finance Companies (2018)

Last year, there was excitement that affordable housing is the big boom. But same stocks are now down as Interest rates are rising, affordable housing projects are low. We just believe 1) lot of families are yet to buy houses, 2) Better Distribution network will take care of growth. 3) All negatives are already in the price.

Pharma (2017)

Markets had bid stocks down as USFDA banned facilities and pricing pressure ate up the margins. We believe, 1) Indian Pharma is one of the low cost manufacturers. 2) Management experience and Governance is good. 3) Debt free companies, trading at 15-17x Earning of a normal year with new filings and all plants operational. Stocks went down first and now recovering slowly.

Information Tech Stocks (2016-17)

Stocks were collapsing as growth is slowing down, Rupee is appreciating, etc. We believed that 1) India has good talent and low salaries to implement IT and digital infrastructure. 2) Companies had large cash almost 15-20% of their market cap which means big dividends or buybacks eventually.

Titan & Consumer Stocks

(Nov-Dec’16) Demonetization had hit the stock price hard. People got scared no one would buy jewellery due to cash crunch. And gold companies will be hit due as black money will get trapped. In those uncertain times, we believed 1) Demonetization might be a 6-12 months’ problem and 2) Titan issues invoices and it’s customers don’t make lot of cash payments.

Indraprastha Gas

(Jul’15) Regulated pricing proposal was up in court. Stock had corrected to a level where even regulated pricing would have given decent upside.

Bajaj Auto

(March’15) Stock was down as scooters were growing and Bajaj wasn’t. But 50% sales of Bajaj are outside India and Pulsar segment has reasonable pricing power due to youth’s fascination about the brand.

Bharat Electronics

(Jan-Apr’14) No one knew was even bothered about defence and didn’t anticipate any reforms in the sector. We bought it at prices from 60-75/share. At that time, cash itself was 40/share on its balance sheet.

These are just few of the cases. We had some ideas which still haven’t worked out.

Commercial Banks

(2016 & 2018) Markets have bid prices down due to high NPAs. We believe 1) NPA is a cyclical story happens every cycle 2) These banks have ability to lend large loans which are required for Infra in the country. 3) They have huge CASA and branch network to be in the business for long.

Tata Motors

Stock price was down due to slowdown in JLR select markets, high capital expenditures in JLR and loss making CV business. We believe 1) Demand is there for luxury cars. 2) Capex is for right reasons to introduce new models in electric and Hybrid. 3) Eventually catch up and generate higher than cost of capital. Stock price is down since recommendation.

We need just couple of winners to make good returns. Even if some stocks go against us, we may not lose a lot as we have bought cheap already. We can easily cut our losses of 10-20% and move on to next idea.

We recommend everyone to use the power of “Who Doesn’t Know That?” to generate sustained returns.

With us you will get access to valuation of 150-180 good companies and their buying prices alongwith margin of safety. This will help you identifying which are stocks are currently pricing in all the negatives and would do well eventually.