Here on The Value Perspective, there are few things more likely to attract our attention than a large fall in the share price of a business. That is how we recently came to be looking at a pair of small Israeli telecoms companies and, while they ultimately proved just too small for our global portfolios, their appearance on our radar was curiously topical.
The reason the two companies’ share prices have done so badly is that, over the last few years, the number of businesses offering mobile phone services in Israel has more than tripled – moving up towards a dozen or so players. Naturally this increased competition has sent call and data prices tumbling and since, reasonably enough, the market expects profits will be similarly affected, share prices across the sector have followed suit.
Regular visitors to the site will now expect us to dwell on how, at some point, the market begins to discount more from a share price than the long-term impact of any fall in profits actually warrants – and we will not disappoint you. Before we do so though, let’s return to the curiously topical aspect we mentioned at the start.
Last month saw the conclusion of the latest round of auctions for mobile phone spectrum in India, which enabled the country’s government to raise $18bn (£12bn) – one more large number, as the Financial Times put it, to add to others from the country’s telecoms sector that includes 850 million active users, annual sales of 200 million handsets and industry revenues of some $30bn.
From 2007 to 2009, everybody was eying up India with those kinds of figures in mind and there was a rush from both domestic and foreign companies looking to benefit from the expected growth. So can you guess what happened next? That’s right – falling prices, nervous investors and, all in all, a dark cloud of gloom hanging over the whole sector. The fierce competition culminated with the 2010 3G spectrum auction, which saw eight companies secure significant portions of spectrum in the country.
But of course the economics of this sort of situation can only persist for a certain amount of time – sooner or later, the weaker businesses are forced to concede they must quit the market or combine to gain scale, leaving the remaining players to make better returns. It is a striking example of our old favourite mean reversion at work.
So when the results of the Indian auction were announced on 27 March, it duly turned out that the vast majority of the spectrum on offer had been snapped up by just four companies – Bharti Airtel, Idea Cellular, Reliance Jio and the UK’s very own Vodafone. Over the years, and for a variety of reasons, the rest of the competition had fallen away to leave this smaller core of principal players.
It is tempting to speculate the same process might be going on in Israel. Clearly it is a very different market to India but those same economic rules tend to apply no matter where you are in the world. A fundamental reason for that, as we never tire of pointing out, is the way human brains are wired. The value lessons of the past – the experience of India’s mobile sector being just one of thousands of examples through history – are there for all to learn yet people tend not to be able to see beyond the specific facts of specific situations at specific points in time.
This may indeed be more interesting to the human brain but the accompanying inclination always to believe that this time it really will be different rarely makes for rewarding investments. If you can buy into a grim-looking business or sector at prices that assume things will stay grim for ever, you may well have the makings of an interesting value investment.