Motilal Oswal on era gone by: Investment methods now & then

Below is a verbatim transcript of the discussion.

Q: One can outline three distinct phases in the last 25 years. In the first phase Motilal Oswal (MOS) was born in 1987 till reforms took hold and Manmohan Singh said that we need to do some fundamental activities to open up the economy during 1987-1992. When you look back it was a period of great chaos, there was open outcry, physical delivery, lack of regulation, disclosure and there were many things that are very different from what we all know and accept and take as natural today. The second phase was from 1992 till the beginning of this decade which was marked by a sea-change in many areas where we had a world class stock coming up, the NSE. Birth of market regulator, Sebi, opening up of the economy and importantly we became outward looking. With world-class settlement system which changed the way exchanges worked; volumes and the ability for people to believe that the market was a safe place. Finally, in the third phase we saw foreign inflows coming in a big way and maturing of the efforts like top quality research and the best practices of the western world being adopted. We saw also the impact of technology what it can do for this industry and we had in 2007 at the end of 2007 a global event that had significant impact on financial markets around the world. So, if you look back and you go back to that first phase the 1987 to 1992 phase, what are your takeaways from that period? How do you think, what did you do then that was different from what you did subsequently and what you would do now?

Raamdeo Agrawal:  In 1987, the so called information arbitrage between this firm that came into existence because there was a difference in stock price of 10% different between Mumbai and Ahmedabad. This was the spot market difference which was prevailing at that point of time.

I could enter into the ring find out the price of some new IPO, like United Phosphorus or any other company and if it is Rs 40 then Zaveri bhai, brother of Moti, he could buy the whole lot of shares at Rs 35-36 and sell the next day.

Q: You are suggesting there was a free lunch then which doesn’t exists now?

Agarwal: The market efficiency gap which was present that time is clearly not present today which is a big difference in last five years. 

Second, that time information available was limited with no TV, internet or books and limited information was available from news papers. Basically, only balance sheet was available. Firstly, the company will send the balance sheet after six months and then even if you read the balance sheet after 15 days and even then if one go and buy the share one could make money. This type of opportunity that was available at that time.

Q: There is a much more slow leisurely approach to investing. You did not have to be with the moment?

Agarwal: Research was not so organized. At that time many people did not use to read the balance sheets and take fundamental call.

Q: Interestingly, at that time do you think research had greater value then or greater value now? Did it give you a greater edge in those days?

Agarwal: Clearly, it gave a much greater edge.

Q: Now top quality research is available with most talented analysts who are hard working, doing right things, have state of the art knowledge, but it is a paradox isn't it that sometimes when you look back the value of research then and now, even though the research may have been very crude and elementary probably had more economic value in stock selection then than it does now? Would you agree with that proposition?

Agarwal: Yes. Earlier, the basic data even with the simple return on equity calculation was an insight to somebody. Now with the electronic databases everything can be computed online. So clearly there is no data arbitrage present.

Q: Anything else that is significant, that stands out in your mind about that period and succeeding periods that you would like to draw upon?

Agarwal: Earlier markets were very unsafe.

Q: Do you think that there has been a fundamental change, which has had a significant impact on how people invest in investor’s expectations in that period and investor expectations today?

Agrawal: That time markets were absolute cash market. Phatka andd Badla was not part of the general life. We use to provide that service, but it was a very minuscule portion of the entire operations. Buying and then transferring the share used to take 3-4 months so for making money, one or two year holding period used to be common phenomenon.