Moneycontrol Pro Panorama | Atop Mt 20k, investors need a Munger principle

India’s economic growth has been one of the factors keeping its equity investors happy.

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

As Nifty reclaims the coveted 20,000 level today, investors seem to have everything in place and a place for more. Predictions of India’s benchmark equity index scaling higher levels have always been around and such instances warrant some more predictions. But we are not here to predict, we are here to crack the investment code that Berkshire Hathaway’s two gentlemen did effortlessly. We are here to pay respects to one of them and as we do, wonder what would have Charlie Munger said about Nifty?

Munger was the formidable force or the brains behind Warren Buffett’s riches and his badge of ‘Oracle of Omaha’. As Buffett’s trusted partner and vice-chairman of Berkshire Hathaway, Munger has been the pivotal force that fetched the company its impeccable record of investments returns.

Munger’s investment philosophy was simple: you fold when the stakes are against you or in other words, you cut your losses. But when you have an edge, you bet big. These big bets were the ones that not only compensated Berkshire for the losses it took on other not-so-smart bets, but also earned the company lip-smacking returns. His obituary by The Financial Times, free to read for Moneycontrol Pro subscribers, reflects on Munger’s personality, his contribution and his style.

According to Buffett, Munger expanded his investment strategy away from his former mentor Ben Graham’s. Graham is known as the father of value investing and fostered an investment strategy that looks for cheap companies to buy that will create value over time. “The cardinal error in Graham’s approach, Munger believed, was that he was trying to avoid the kind of pain he experienced in the Great Crash of 1929 by seeking out bargains. But it also meant that Graham was missing scores of wonderful companies that were trading at fair prices,” the FT piece says.

What companies are wonderfully priced at Nifty Mount 20k and worth Munger’s big bet?

While picking so-called multi-baggers is tricky, our research team provides the reasons why some firms look promising on the growth front. If you have conviction on India’s consumption growth, the Tata Group’s Trent Ltd’s strong earnings show and rapid network expansion support its growth ambitions. Craft Automation in the auto ancillary industry has multiple levers that would help its revenues in the coming quarters, Nitin Agrawal points out.

Before we make investment decisions, it is pertinent to remember that Buffett and Munger’s success was also based on their capacity to wait, rather than buy and sell willy-nilly.

But what are we waiting for? There are a list of factors to watch for as pointed out by Ridham Desai, managing director at Morgan Stanley in a comprehensive interview here with my colleague N Mahalakshmi. Desai believes that an earnings upside is not fully priced in by the markets and that earnings growth could exceed 20 percent annually over the next four years. Meanwhile, Desai lists six factors that investors must look for in the new year, one of which is the US Federal Reserve’s rate cuts.

In fact, the source of optimistic sentiment that is driving Nifty up Mount 20k is growing expectation that the US Federal Reserve could soon explore rate cuts. Fed governor Christopher Waller indicated that rates could begin to fall if “inflation is really down”. If the Fed rate cuts are around the corner, that would mean the cost of capital globally could get cheap. It would also help dollar inflows into emerging markets such as India.

Stock markets reflect the underlying economy, at least somewhat. India’s economic growth has been one of the factors keeping its equity investors happy. The second quarter gross domestic product (GDP) growth will be out this week and the number is likely to be robust. My colleague Manas Chakravarty gives the highlights of what to expect here.

At any given point in time, equity investors have multiple areas to look at before making decisions and many a time, the sheer number of events can overwhelm.

Here is a Munger gem that gives some clarity: “Part of [having uncommon sense] is being able to tune out folly, as opposed to recognising wisdom. If you bat away many things, you don't clutter yourself.”

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