My Best Pick 2016

Ranting of a value investor

Economic growth is in limbo but asset prices continue to be valued abstractly

VISHAL KOUL/ LOCATION: INDIA GATE, NEW DELHI

Robert Cialdini’s theory of influence lists ‘authority’ and ‘scarcity’ among the six principles of persuasion. And there are plenty of examples of both in the consumer market. Celebrity endorsements are an example of the former, while inaugural or exclusive offers, limited-edition etc. are examples of the latter. In fact, even airlines egg you to push the trigger by reminding you, ‘3 seats left’. Authority and scarcity are extensively used by peddlers to maximise the perceived value of a product/service regardless of its real value. More so when things which don’t have an overt physical utility (except inviting envy) like art, gold or luxury goods are in play. Art is perhaps where the value truly lies in the eyes of the beholder. Its value is randomly determined by prices quoted by different pairs of eyes in an art-auction. The price of gold also has gyrated in the last 15 years with the highest price being 6x its lowest price. 

In the financial markets, even funnier things happen. After the end of the barter system and abandonment of the Gold Standard, money’s most important use is as a medium of exchange. And when central banks endlessly open their spigots, it opens a Pandora’s Box where intermediaries with ‘authority’ start unduly influencing the price in real product markets. This phenomenon mostly explains what happened to commodity prices in the past decade, which moved far north than they would have if determined purely by the forces of demand and supply.

In the stock market, too, at any given instant, those who don’t care about intrinsic value far outweigh those who do. They operate in the realm of the abstract and so we see stocks quoting mostly far above or below their intrinsic value. This aberration is even more pronounced with one-of-a-kind businesses in the unlisted space. They command a premium over a business which has many listed options, even though the robustness, longevity and financials of the two may be similar. 

Just to illustrate how arbitrary a basis of valuation could be, at one point, dotcoms were valued on the basis of eyeballs. Then came a phase when they were valued on the basis of ‘cash burn’ (the quicker you spent, the higher the value). Later, a saner basis of valuation emerged, i.e., sales growth, even if it was a profitless one. We s

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