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T N Ninan: 'Stick to gum'

For all those looking for ways of making money in the share bazaar, here is some free advice from the smartest cookies on the market

T N Ninan  |  New Delhi 

Eleven guests were seated around the lunch table, talking about India to the world’s rock star investor, Warren Buffett. The food choices included Buffett’s well-known favourites (hamburger and Cherry Coke). As for the guests, those present included men who had invested their own money and those who had managed money for mutual funds, hedge funds and private equity. While Buffett concentrated on his food (hamburger and Coke!) and listened quietly, the discussion was guided by his colleague Ajit Jain. Eventually, there emerged from the India specialists (who for propriety’s sake must remain unnamed) some interesting perspectives on the question of investing in one of the world’s fastest growing economies. For all those looking for ways of making money in the share bazaar, here are some of the experts’ insights, free advice from the smartest cookies on the market.

In a rapidly growing economy, where even the worst-case scenario is 7.5 per cent annual GDP growth, there will always be investment opportunities. The non-agriculture, non-defence part of the economy is growing at anything up to 17 per cent annually. Also, it is in the nature of things that disposable incomes will grow much faster than GDP growth, and this will throw up some very attractive business opportunities. However, there are some minuses to be factored in. Many segments of the market are subject to the vagaries of government decision-making, so there are risks. And if you are an investor who is concerned about the standards of corporate governance and responsibility to stakeholders, the investible set that can be considered becomes quite small.

You can get past the vagaries of government decision-making because there are sectors that are immune to this risk (like consumer goods). The more generic problem is that the Indian market is already the most expensive in the world, so any worthwhile stock is either fully priced or even over-priced. You can only look to buy them when prices drop, which happens every once in a while. Given the environment and the outlook, the best days of private equity investing may not return.

In general, India is a better place for building a business than it is for plain investing. Why? Because there are barriers to entry that new players face, and those who are already in the game are, therefore, able to capture better returns. Companies doing plain manufacture are able to deliver margins of 20 per cent and more, which does not happen in more competitive markets. For a variety of reasons, the environment is also more friendly to domestic players than international entrants.

Will this change? Perhaps. If entry becomes easier for new players, the outlook for return on investment will not be that great because margins will drop and so will valuations. The outlook for return on investment is therefore 10 per cent-plus. Since that is net of inflation, it didn’t sound like a bad figure, but you can decide.

And what did Buffett himself say? Before posing for photographs with his guests, and amidst some homely wisdom on what the important things in life are, he recounted the story of his first encounter with a well-known tech entrepreneur. Buffett said he asked a lot of questions; among other things, he was told how the internet would change everything. He asked if that would change people’s habits with regard to chewing gum. No, was the answer. Would it change people’s brand preferences when it came to gum? No. “Then I will stick to gum,” Buffett said. (He bought a minority stake in Wrigley three years ago.)

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First Published: Sat, March 26 2011. 00:11 IST