When Buffet's investment idea of “buying a stock to hold it for life” may not work?

Written by: Sunil Fernandes

When Buffet's investment idea may not work
Do a quick search on one of the popular investment portals and you would see quite a few brokerage recommendations under IRB Infrastructure, a leading infrastructure company. Today, investors who decided to buy and hold the stock for a lifetime, may not be advised to do so. Reason - the Chairman of the company along with two other executives have to undergo a polygraph test in a murder case. The stock is down almost 20% in the last few trading sessions.

A few weeks earlier to the IRB episode, Children's Investment Fund (TCI) said it was initiating legal action against Coal India (single largest coal producer in the world) for breaches of key provisions of Indian corporate law, namely, breach of fiduciary duties and CIL’s affairs being run in a manner that is both prejudicial to the public interest and oppressive to shareholders. Shares of Coal India plunged after the news, though it may still be a stock you want to buy and hold for a lifetime.

A few weeks earlier to Coal India, Veritas dubbed India’s largest realtor DLF, ‘a crumbling edifice’. It questioned the disclosed book equity and asset base of the company, hinting at irregularities in the DLF and DLF Assets Ltd merger. The stock plunged by almost 10% in a few trading sessions.

In an investment environment like India, “buying a stock to hold it for life” may in most instances result in losses despite careful analysis. The reason of course is poor corporate governance standards, regulatory hurdles and poor credibility of promoters, which are big hurdles that you might not want to invest for a day, forget a lifetime.

While the above three examples were ones of credibility and corporate governance, let's examine regulatory hurdles, which have played havoc with stock prices.

A couple of years back, an investor recounts how he bought into the shares of JSW Steel, a blue chip steel company with one of the best operating margins in the business. The Honourable Supreme Court decided to ban iron ore mining in the state of Karnataka and JSW Steel tanked more than 20% in a few trading sessions as its plant in Karnataka was starved of quality iron ore. A classic case of living in a dynamic regulatory environment.

Telecom stocks were flying in 2007 and 2008 riding “piggy back” on whopping mobile telephony growth rates. Rcom, Idea Cellular and Bharti Airtel were trading at very rich valuations. RCom has plunged from highs of Rs 700 a few years ago, to Rs 69 today, and one is getting a pittance for the share. Ditto for Bharti Airtel and Idea. Again, frequent regulatory interferences from TRAI and of course a big scam.

DB Realty (promoter arrested in 2G scam), Mannapuram Finance, Muthoot Finance (frequent regulatory changes from RBI), IGL (Petroleum and Natural Gas Law Board asks it to cut gas prices by 63%) are classic examples, where shares have plummeted following regulatory interventions.

Perhaps, we are being too cynical – certainly not. In 1996, there were 1408 IPOs averaging around 27 a week that sought listing on the bourses. It would be a surprise if you found even 20% of these are listed and actively traded.

Buffet is right when he says “buy to hold for a lifetime”, and he does say to evaluate performance and other aspects frequently. But, in the Indian context, regulatory challenges, corporate governance deficit and promoter credibility damage happens so swiftly, that the stock leaves very little room for exit.
Of course, we can't paint all companies with the same brush, as there are many that have delivered, but these are “few and far between”.


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