One of the smarter analysts I know (actually a chartered accountant who runs a media business) had joked on Friday that if Infosys used its cash balances to trade other information technology stocks based on information about its own financials, it could probably log a 100 per cent annual return on these. What is more, this would be perfectly legal.
Complicated? Not really. Follow the chain of logic underlying the joke. Infosys knows what its own financials will be. It has a pretty good idea what the market reaction to its quarterly results and guidance will be, based on past reactions and interactions with its own investor-base, which includes a wide range of domestic and foreign institutions.
Infy is an early bird, among the first to declare results every quarter. It is a bellwether for the IT sector - setting a benchmark for other outfits. It has a large weight in the broader Nifty and we saw that effect on Friday, when the stock fell 20 per cent and pulled the Nifty down with it. It is in direct competition with other IT businesses and knows as much as any outsider about the business dynamics and efficiencies of other IT companies.
I am not, of course, suggesting Infosys will ever do this or that it would be a smart thing for an IT company to become a speculative investor. However, that joke sparked thought experiments worth exploring at an individual level.
A basic premise of active investment is to understand the businesses you own. Every fundamental guru, from Warren Buffett to Peter Lynch and Phil Fisher, has emphasised the need to understand the drivers and nuances of a given business, in addition to balance sheet analysis.
One of the best ways of understanding a business is to work in the same industry. This guarantees that a large part of the industry gossip, the news about hires and fires, changes in management strategies, takeover rumours, cash-flow problems, etc, will be readily available, by osmosis.
That information can be sifted and turned into well-timed investment decisions. Some of the best "amateur investors" I know have been successful at this. It is a method that can even work when the industry in question is in bad shape and not qualify as a great investment.
Tea, for example. The tea industry has endured a massive number of problems over 30 years. There have been insurgencies in Assam, the Gorkhaland agitation in North Bengal, endemic labour issues, competition abroad from aggressive Sri Lanka and Kenya, plus the usual ups-and-downs faced by any agro-commodity.
One of my friends is a tea-taster, with an unlisted firm. To my knowledge, he has never invested in any shares outside the tea industry. Yet, he has made quite a lot of money, simply because he's always bought tea company shares at close to cyclical lows.
I know nobody else with a single-industry portfolio and that is intrinsically high-risk. But I have a few other friends with narrow-focus investment strategies that lead to them being heavily overweight in the industries where they work. It seems to work well in practice.
Focused investors of this sort are in a minority. Most people never seem to look at their own industry as a potential investment opportunity. Plenty of IT industry employees have failed to maximise returns from employee stock ownership plans (ESOPs) because they sold the instant their options vested.
Most investors are employed somewhere or run some sort of business. Most would sooner punt on rumours about industries they know nothing about. Is this a case of the grass being greener on the other side? Or an instinctive fear of being under-diversified?
Complicated? Not really. Follow the chain of logic underlying the joke. Infosys knows what its own financials will be. It has a pretty good idea what the market reaction to its quarterly results and guidance will be, based on past reactions and interactions with its own investor-base, which includes a wide range of domestic and foreign institutions.
Infy is an early bird, among the first to declare results every quarter. It is a bellwether for the IT sector - setting a benchmark for other outfits. It has a large weight in the broader Nifty and we saw that effect on Friday, when the stock fell 20 per cent and pulled the Nifty down with it. It is in direct competition with other IT businesses and knows as much as any outsider about the business dynamics and efficiencies of other IT companies.
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The IT major definitely has a knowledge edge over other investors, including the institutional specialists in that specific sector. If Infy's cash reserves and expertise were used to buy or sell other IT shares, it should outperform. Such an operation would also be legal so long as there was no trading in Infy's own shares.
I am not, of course, suggesting Infosys will ever do this or that it would be a smart thing for an IT company to become a speculative investor. However, that joke sparked thought experiments worth exploring at an individual level.
A basic premise of active investment is to understand the businesses you own. Every fundamental guru, from Warren Buffett to Peter Lynch and Phil Fisher, has emphasised the need to understand the drivers and nuances of a given business, in addition to balance sheet analysis.
One of the best ways of understanding a business is to work in the same industry. This guarantees that a large part of the industry gossip, the news about hires and fires, changes in management strategies, takeover rumours, cash-flow problems, etc, will be readily available, by osmosis.
That information can be sifted and turned into well-timed investment decisions. Some of the best "amateur investors" I know have been successful at this. It is a method that can even work when the industry in question is in bad shape and not qualify as a great investment.
Tea, for example. The tea industry has endured a massive number of problems over 30 years. There have been insurgencies in Assam, the Gorkhaland agitation in North Bengal, endemic labour issues, competition abroad from aggressive Sri Lanka and Kenya, plus the usual ups-and-downs faced by any agro-commodity.
One of my friends is a tea-taster, with an unlisted firm. To my knowledge, he has never invested in any shares outside the tea industry. Yet, he has made quite a lot of money, simply because he's always bought tea company shares at close to cyclical lows.
I know nobody else with a single-industry portfolio and that is intrinsically high-risk. But I have a few other friends with narrow-focus investment strategies that lead to them being heavily overweight in the industries where they work. It seems to work well in practice.
Focused investors of this sort are in a minority. Most people never seem to look at their own industry as a potential investment opportunity. Plenty of IT industry employees have failed to maximise returns from employee stock ownership plans (ESOPs) because they sold the instant their options vested.
Most investors are employed somewhere or run some sort of business. Most would sooner punt on rumours about industries they know nothing about. Is this a case of the grass being greener on the other side? Or an instinctive fear of being under-diversified?