What Is Making Money? 21. May 2012 Rahul value investing (0) The doom and gloom in financial markets has made the world a very pessimistic place. Investors and business people are frustrated by the state of the economy, the state of politics and it seems like there is no end to the number of crises looming on the horizon. The problem with top-down macro analysis and journalistic reporting is that everything is painted with the same broad brush. The quest for trends forces one to either be positive about all things in general or negative about all things in general. There is no intermediate stage. Warren Buffett and Ben Graham have advised us to look at stock certificates as pieces of underlying businesses. They have taught us that although the market may be a voting machine in the short term, it is a weighing machine in the medium and long term. People who subscribe to the above school of thought usually ask me the next logical question - what is making money? Their question is usually qualified and loaded. What they really want to know is industries or sectors that are making money and that offer prospects for good returns. I always struggle to answer this question. The immediate rebuttal I then receive is that I am struggling to answer the question because there aren't really any sound investment opportunities in the market. In my mind, the industries and sectors question is a distant cousin of top-down macro analysis. I can tell you (in the Indian context for sure) that there are some sectors that are extremely tough to make money in - e.g. airlines, labor intensive textiles etc. I can also tell you that there are some sectors which almost never make real money over time, no matter what they report and how good their financial statements appear. The appearance is merely an illusion. Examples include leveraged lending instutions like banks, capital intensive telecom operators etc. I can then tell you that there are sectors like consumer brands and patented technologies that do make a lot of real money. But whatever I can tell you is almost completely irrelevant to investing and making money in the market. The real question to ask is what company is making money and is it available at a price that is attractive relative to the amount of money it is making? The problem with asking this question is that unless one is actively involved in researching companies and knows the names and businesses of the companies mentioned, the answer can be completely unrelatable to and completely unevaluatable in the moment. That is not a desirable outcome for most questioners and is usually a conversation ender. I cannot find a single industry or sector in India today that is a home run or slam dunk. But then, even in the boom times, I wasn't able to find a sector without its fair share of problems. I think that mid-size Indian IT companies have huge and almost insurmountable problems ahead of them, however, I am able to find several mid-sized Indian IT companies that are making money hand over fist and are likely to continue doing so. I think these companies make for very attractive investment opportunities because in this doom and gloom they are also available at very attractive prices. I can find paper companies that are attractive despite structural problems in the paper industry. I can say the same thing about real-estate companies, agri-related companies, chemical companies, energy companies, mining companies etc.etc. I can also find numerous sectors like domestic consumer goods and Indian listed multinational companies that are making a lot of money but where the high prices of their stocks makes them completely unattractive investments. In conclusion, the answer depends on the question asked. One has to, therefore, first ask the right question. My answer to the wrong question is that I am unable to find any attractive sectors or industries in India, but my idea pipeline of attractive individual companies is exploding.