Sunday, July 15, 2012

Such investors could make FIIs worthless!

It is not easy to be greedy when others are fearful! Ones that manage to stick to their conviction certainly make a killing. Going against the opinions of Mr Market time and again is what it takes to be a truly successful value investor. But unfortunately, in stock markets like one in India, it takes more than fundamentals and valuations to score well. Particularly in the short term. For foreign investors playing the cheap money - high returns arbitrage control most of the market liquidity. And every time there is the slightest hint of short term uncertainty, they prefer to withdraw. It is therefore not uncommon for even the most astute investors to find their portfolio in the red in the short term. Stocks bought at unbelievable valuations head even lower. Ones sold at lofty prices often tease investors by going even higher. But those who can avoid a panic attack from these gyrations can truly savour the fruits of patience in the long term. That makes us wonder how wonderful would it be if Indian markets could rid themselves of the foreign institutional investors' (FII) whims and fancies altogether!

Some of our homegrown institutional investors have not always been at their best and most prudent behavior. Reason being many of them are government controlled. And the government's political interests are not always aligned with economic interests, as we all know. Hence every time we come across a shrewd move by any of the large domestic investors we are nothing but delighted! Take the case of Life Insurance Corporation of India's (LIC). The insurance giant has billions at its disposal for long term investment. But rarely does it show the astuteness that it did yesterday. LIC purchased Rs 20 bn worth of shares of software behemoth Infosys right after the stock crashed post a disappointing result announcement. Now buying a fundamentally robust and extremely well managed entity at a time when Mr Market is fearful is laudable. The fund managers at LIC managed to shut out all the noise with regard to Infosys' delayed hiring plans. Instead they focused on whether the company is capable of yielding safe and handsome returns over the long term.

We only wish that LIC acts more often like this whenever the FIIs play truant. Also having more entities like LIC (pension funds etc.) could make FIIs worthless to Indian markets altogether! We know that this is wishful thinking for the time being. But if the government is keen to make Indian capital markets more investor friendly, having strong domestic institutional investors is paramount. Not only will it bring in some resilience in the capital markets. But it will also give confidence to retail investors about their decisions in value investing.

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