Trying to time the market is like FLIPPING the COIN – Prashant Khemka

PMS AIF WORLD organised a webinar with Mr. Prashant Khemka, Founder WhiteOak Capital for our investors to get answers to questions related to Markets & Valuations.

This article presents the interpretations, and excepts of discussion done between Mr. Khemka and Kamal Manocha, CEO PMS AIF WORLD

All valuations globally are benchmarked against the long term US bond yields. In mid 90s, the long term US bond yield was around 6 to 7%. If you were to inverse the bond yields, the multiple for US bonds was 14 to 17 times then. At that time S & P 500 was also trading at a multiple of 15 times, just in line with bond yield multiple. And, all the other markets were trading at some premium or discount depending upon the growth expectations of each economy. Today, US long bonds are trading at 1 to 2 % yields, so effectively bond multiples have gone to up significantly to 60 – 70 times, and the S & P 500 is trading at 20 times. The context is not to suggest that S & P is at a discount to bond yields, but, to convey and explain that why we see high valuations which may continue in the US and other major economies, like India. For valuations to correct, bond yields need to go up significantly which looks unlikely as there seems to be a death of Inflation. Today inflation expectations are non-existent, and world central banks are focused on growth rather than inflation. So, one needs to keep all this in mind, while one perceives equity to be at high valuations.

A particular sector might be seen riskier or negative in any or every scenario. But, there are great businesses in every sector. These are the ones which show attributes of generating superior returns on incremental capital which would then deliver the capital light free cash flow because for that return on incremental capital has to be higher than the cost of capital. Being concerned is not bad, but trying to time the market is like FLIPPING the COIN. Wealth is not created by timing the market, but, by determining the businesses, and investing in quality that compounds over years.

Government owned entities or PSUs world over are a different asset class, different than Equity. In these businesses, management’s interest is not aligned to the minority shareholders, as these businesses are inclined to social purpose & greater public service. So, this could be viewed as separate asset class as in these businesses compounding which is the trait of equity, is missing.

We often times in India fancy the famous investors from Worldwide and take whatever they have to say about anything & everything as a gospel. Particularly, it is surprising to find that we even take the comments about India as Gospel. We forget that all those supposed to be smarter world-wide investors have limited knowledge about India. So, their conclusions for India could be far from reality. Most recent negative predictions in this context should be taken with pinch of salt, rather, a bag of salt.

Unfortunate aspect about such times, is that many fund managers & investors end up becoming macro investors or market timers. Focus should be on stock specific risk factors. Macro factors are like coin flipping. Stock picking also has an uncertainty but its not like coin flipping. Fund manager betting on Markets is like Virat Kohli betting on outcome of Coin Flipping. For both success lies in knowing the game.