Thursday, 4 August 2016

“Goods and Service Tax (GST): An investor’s path”

With the GST bill passing through the various legislative hurdles one by one; it’s a matter of time before it gets notified by the president of India as a law. It is truly a significant step, in having one common market across the country, which helps facilitate increased efficiencies in business and taxation. As a result, we have many commentators telling you which sectors / companies etc will benefit from lower taxation and which will be hurt from higher taxation that GST entails. Do note GST rates are still to be notified by the GST council latter.

For an investor this is all confusing, he is now to buy into an event (on the advice of these commentators) which everyone is expecting and yet is told he will make money in this shortly to take place event. As such, pointing to an impossibility of everyone winning, as you know,  in the long term the stock market may be a winners game, but in the short term there is a looser for every winner. Here are sworn efficient market players, now refusing to acknowledge even a weak form of efficiency, on information that has dominated headlines for months now.

As Howard Marks says this first level thinking is done by almost all players in the market, hence will not lead to a winning edge. To have an edge you need to think better than others (i.e more effectively and at a higher level), so that you see, what they miss or do not see or have no insight on. This higher level thinking is labelled as second level thinking by Marks. To give an example of this: First level thinking says. “It’s a good company; let’s buy the stock”. Second level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock is overrated and overpriced, let’s sell”. As you will observe First level thinkers have no right to win in a highly competitive activity that is the stock market.

Having established the need for second level thinking, let’s try and portray first and second level thinking in the GST case.  First level thinking, “It’s a company that is going to gain out of lower GST rates(its current rate being higher than the maximum GST rate allowed); lets buy the stock”. Second level thinking says, “ Yes the company will  have a lower GST rate, everyone thinks it will benefit, but due to intense competition it will have to pass on almost  all the benefits to the consumers, so the stock is overpriced , let’s sell”. Keeping this in mind, there are some easy places to look for winners out of the introduction of GST.

  •  Consumer facing businesses with nationwide scale, having significant market share as well as pricing power.
  •  Businesses having nationwide scale, facing huge unorganized competition, which may be evading taxes.
  •  Goods transporters, demand of whose services will benefit out of consolidating of warehouses and one market nation-wide economics.
But then isn’t investing simply about buying a business with sustainable competitive advantages (that may give volume or pricing power or a cost advantage), with a large scalable opportunity at a reasonable price versus value. GST doesn’t change that.

in your service

Dinesh da Costa, CFA                                                                                                    
Principal Officer
Investment adviser
Zara Investment Advisory
Mobile: 9822280576

Please note information given above is not a recommendation to invest, but an educational illustration.
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