The Hindu Business Line : Nothing is more important than experience

WHEN the index tanks, as it did a few days ago, what you need is not sympathy but advice on "how to make money in both bull and bear markets". So, here is Kirk Kazanjian's "The Market Masters," from Wiley (www.wiley.com) , bringing together insights he gleans through one-on-ones with "eighteen managers who are clearly at the top of their game".

For, when it comes to investing, nothing is more important than experience, as the blurb instructs. While "it's easy to look like a genius when the market goes straight up," it is in the more difficult times that the real challenge comes up. The book opens with the views of Manu Daftary of DG Capital, who doesn't believe in categorisation as growth, value, small and mid-cap. There should be flexibility to adjust the profile of the portfolio based on an evaluation of the risk level of the overall market, he opines.

Another useful tip he offers is that you better spend more time to ensure you avoid the losers than to find the winners. "If you go down 40 per cent, you must go up 67 per cent to break even again. If you can truncate the downside, you'll have all the money to play on the upside, which is where all the money is made in the stock market."

The book's value lies in the pointed questions that the author poses to the masters. Such as the one to W. Whitfield Gardner, "Is earnings growth the number-one thing you look at?" Gardner's answer is equally straight: "It is important, as is valuation, but even more important is the change taking place in the business that others haven't perceived that will drive earnings beyond that which is expected. We also check to see how strong the company's balance sheet is, with a focus on low indebtedness or strong cash flows."

The FM has been assuring us that the price-earnings (PE) ratio is still in the comfort zone. When is comfort better: when PE is lower than overall market PE, or when it is lower than its own historic PE? Janna Sampson of OakBrook Investments explains that you should look for instances where the PE is lower than its historic PE, relative to the market. "If its normal premium to the market is 50 per cent, and it's now down to a 10 per cent premium, it's probably attractive from a valuation perspective."

Samuel Stewart of Wasatch Advisors goes beyond PE - to PE to G (for growth, that is) - when taking on Kazanjian's question, "If a company is growing at 40 per cent a year and selling 40 times earnings, is that reasonable to you?" Stewart says that, in general, he'd like to buy a company in the neighbourhood of a ratio of 1. "So if the company is selling at 40 times earnings and growing at 40 per cent, that would be a buyable company. But if it's only growing at 30 per cent, you might just nibble a bit. If it's only growing at 20 per cent, you'd probably say that's too expensive."

On whether you can bet on computers to dish out ready lists to invest in, John C. Thompson has reservations. "Screens have some great points, but they can kick out good companies or give you names with numbers that are artificially high and unsustainable," he says. Watch the news and price action every day, to spot good companies that are down in price, he advises.

Isn't a qualitative angle such as management important, asks the author? Thompson says, "The numbers are the score of the game... I think management is a very difficult thing to determine the quality ahead of time unless you're talking about somebody who has been in that position for many years with a proven track record... Management is a variable, it's not a constant."

Robert Lyon of Institutional Capital speaks of an oft-ignored area, agriculture. Why? Because demand for high-protein diets coming out of Asia is growing, he explains. "There's a certain core level of income, and once you get past that, the desire to have luxuries, including meat, goes up. Every day in China, India, and Vietnam, thousands of people are crossing that threshold and all of a sudden they want, and need, more protein."

To help you read the P&L and interpret the gross margins, here's some clue from Andy Pilara of RS Investments: "If somebody tells me he's got a proprietary product and I see gross margins of 17 per cent, he's fooling himself... A proprietary product has growth margins north of 30 per cent."

Richard Pzena of Pzena Investment Managment has been a private pilot. He says that it shouldn't be hard for active managers to beat the indexes. "If that's true, why do the majority underperform the market over time?" asks Kazanjian. "Because they don't follow their discipline and get sucked into what's working at the moment. They're always a day late and a dollar short," says Pzena.

Great value for money, if you aren't short of cash.

BookValue@TheHindu.co.in

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