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“If 50 million people say something foolish, it is still foolish”

I am reading this book, “The art of thinking clearly” by Rolf Dobelli. Will really recommend every investor to read this one. Rolf Dobelli had really explained the content with the help of his own personal examples which makes it more practical and fun to read this book.

While reading this books fourth chapter, it reminded me about the Infosys. In this chapter he is talking about the ‘social proof’. Imagine you are walking down the road and find a group of people, all starring at the sky. Without thinking about it, you peer upwards too. Why?

Like this, there are many occasion when we feel that by following a crowd we are doing right thing. In other words the more people follow certain idea, the better (truer) we believe the idea to be.

This characteristic of individual is a social proof and this social proof is the evil behind the bubbles and the stock market panic.

Why this chapter reminds me about Infosys? If this is what you are thinking about then let me explain this to you.

Infosys is the investment quality grade business and we had an opportunity to own this business when it was trading at Rs 2100 last year. But we rejected the idea and we don’t regret that as the one we chose to invest with in this sector had given us far better returns than what Infosys did.

Infosys had come out with really good quarter results after a long time.  An investment quality (A2) had allowed us to keep this business in our radar. But, even such a good quarter results have not impressed us and also we think it is expensive to buy at current levels. The return on equity is in downtrend and is expected to come down to 26% from 29% three years back.

When we say it is expensive that does not mean we expect the prices to fall. What that means is that there is a bigger chance of prices to go down than up.

Many brokerage houses and investment management businesses have lifted its price target after the 2014-15 forecast. Kotak securities have come out with 12 month forward looking at target of Rs 3900 (click here).

The range of March 2015 earnings for Infosys is Rs 189 – Rs 243. This reflects a PE ratio of 18.79 times – 14.61 at Fridays price close. Many analysts consider PE ratio of 15 times to be fair value for Infosys. We do not value businesses with PE ratio as we believe that it is also important to consider what investors have invested in the business to fetch those earnings (ROE).

So, we think that the fair value of Infosys for the 2015 year in range of Rs 1844 – Rs 2731. If you think its earnings will be around high end (Rs 243) then still it is very expensive to buy at this time.

It is here you have to make decision, either follow majority of investors who are investing in hope of its price to breach Rs 4000 levels or invest looking at the facts and thinking clearly.

If you had invested in Infosys for the last one year than your returns are 26% excluding dividends.

If you had invested in Infosys for the last two years than your returns are 38% excluding dividends.

If you had invested in Infosys for the last three years than your returns are 5% excluding dividends.