You don't need multibaggers to beat the index!

Jan 19, 2011

In this issue:
» US Federal Reserve will not last for more than 25 years
» Commerce ministry expresses concern over RBI's possible rate hike
» Global fund managers turn bearish on India
» Industry titans come together to fight against poor governance
» ...and more!!

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Each one of us wants to invest in the next Titan Industries or Infosys in the making. After all, these companies have been amongst the biggest wealth creators in recent times. Investors argue that it is the ability to identify such multibaggers early in their lifecycle that enables one to outperform benchmark indices over the long term. But is such a strategy easy to implement? Certainly not we believe. There are hundreds of small companies out there wanting to be the next Titan or Infosys. Zeroing on a few promising ones is indeed a very tough job. Furthermore, one wrong investment and one's capital could be wiped out completely. How then should an investor invest so that he is able to beat the indices?

Allow us to tell you the story of this famous US fund manager, Bill Nygren. His fund has been able to beat the US benchmark indices over a 10 year period and that too, by a wide margin. And he did not achieve this record by investing consistently in multibagger stocks. Infact, you would be shocked to know that if his performance is divided over several quarters, he lagged the benchmark indices for a good 75% of the time. Given this, how does one explain his outperformance over a 10-year period? Well, he attributes this completely to losing less than the benchmark whenever his performance lagged the benchmark index. And therein lies the biggest lesson for value investors we believe.

In order to beat indices over the long term, capital has to be protected during down markets. In other words, you have to invest in companies that have strong moats and are available at reasonable valuations. After all, even Warren Buffett admits to this philosophy when he says, "My rule no 1 is not to lose money and my rule no 2 is not to forget rule no 1."

Do you think we can beat markets over long term by not looking out only for multibaggers? Let us know or post comments on our Facebook page

 Chart of the day
The recently concluded Vibrant Gujarat Investment summit created a record of sorts. In two days flat, it managed to sign MoUs that envisage a whopping investment of US$ 462 bn into the state of Gujarat over the next few years. The summit, a biennial event, has come a long way since its inception and today's chart of the day tries to highlight the exponential growth in investments committed that the summit has witnessed over the years. While the investments that have actually fructified have been a small fraction of committed investments, it still is a very good achievement by the state and it is time other Indian states too take some lessons from this.

Source: Wikipedia

The initial set of December quarter results of India Inc give us mixed feelings. Of course, there are few bright spots in every sector. With the help of their competitive advantage some companies have managed to contain margin erosion. But the overall growth in sales and profits echo the cautious sentiments that we had cited prior to the result season. India Inc has the heydays of profitability behind it. Input costs and interest rates have been soaring. In such a scenario retaining growth rates on the already high base is a stiff task.

The Commerce Ministry has in fact sounded alarm over the recently released IIP numbers to the Finance Minster. The disappointing industrial production is feared to halt India's GDP growth engine midway. Taking into account the risks to GDP growth, the RBI may not find too many supporters in the government for its rate hike plans. The bank though has a reputation for taking decisions in India's long term interests, no matter how controversial they sound in the short term. This time too, it should not be any different we believe.

The Romans had a saying: 'The grandchildren should not bear the debt of the grandparents.' Sadly, Americans don't seem to have followed the adage. Nasim Taleb, who rose to fame with his book 'Black Swan' prophesises doom for the US. He thinks that the "Federal Reserve will cease to exist within 25 years." And not just the Fed. But any other institution that fails to recognize risks tied to its actions will disappear and be replaced.

The risks tied to the house lending policies were apparent prior to the crisis. But Fed officials disregarded all the warning bells. And now, in a vain attempt at reviving economic growth, it is buying debt from private banks in order to spur those banks into lending more. At this rate, the future looks quite bleak for the US. Tough times lie ahead for its children and grandchildren.

When reading on the scams and scandals, one always wonders if there is anyone bold enough to stand up against such issues. At such a time, it comes as a pleasant surprise to see some of the country's top honchos getting together to express concerns over the "governance deficit" in the country.

A group of prominent and powerful industrialists have asked the government to deal with the corruption issues urgently. The group that includes the likes of Azim Premji, Keshub Mahindra and Deepak Parekh, has asked the elected legislators to demonstrate responsibility for restoring the confidence in national institutions. The group has termed corruption as "the biggest issue corroding the fabric of our nation". The group states that unless the issue of corruption is dealt with more effectively, it could derail India's growth story. We just hope the government pays attention to these and takes corrective action soon.

Indian stock markets so far have had a dream run. With prospects of higher growth as compared to the developed world, foreign investors have poured money by the truckload in equities since early 2009. But this buoyancy seems to have fizzled out since the start of 2011. And not without reason. Although India's GDP growth has not disappointed, some serious concerns have emerged which have the potential to slow growth in the future.

On the top of the pack is inflation. This has been high for quite some time now largely on account of higher food prices. No amount of good rains has come to the rescue and the government so far has been flummoxed in terms of bringing it under control. Economic data has been weak as well. The IIP data was weak coming in at 2.7% compared to expectations of over 6%. Commodity prices have been rising and are expected to put pressure on profit margins of Indian companies. Rising crude prices are expected to further stretch the Indian government's balance sheet. Indeed, the current results season will give an idea of how the profitability of India Inc. will pan out in the coming quarters. Thus, foreign investors have adopted a cautious stance on India and are looking at other attractive options in the Asian region.

Meanwhile, the Indian markets opened strong today but gave away all their gains and went into the negative during the second half of the day. At the time of writing, Sensex was trading lower by around 100 points. Heavyweights like Infosys and L&T were seen causing maximum damage. As far as Asian indices are concerned, they closed mixed today whereas Europe is also trading mixed currently.

 Todays' investing mantra
"I don't read economic forecasts. I don't read the funny papers." - Warren Buffett

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7 Responses to "You don't need multibaggers to beat the index!"


Jan 21, 2011

Pray to Lord so that you don't lose. Remember to pray
Watch out for BUBBLES, burst they will.Over exposure needs to be limited.
The only way to balance is to have and evolve a set of basics, and keep away from thrills and chills,
If you are a profit monger, no one can help. Do not be fooled into Overtrading.
Preparation, discipline can balance.
Observe but NO EXPERIMENTATIONS. Leave it to the analysts.
There is no harm taking two steps back if you are pushed back one! And ten, if you are pushed back two steps. Gauranteed you can't lose more when you are there. Ofcourse win you may not:
Is it not better than losing all!


Yagnesh Patel

Jan 21, 2011

I feel that the prices of market leader stocks are heading towards new low. Midcaps have already reached at new low. So before budget, sensex will definitely reach below 18000.



Jan 19, 2011

I can not agree more. It's always easy to look back and pick up a winner. But over longterm its important to protect your capital first, and then look at the returns during bear and bull market. 2nd ly picking up the stock at low price is v v critical as you insist. And it really needs a lot of patience and discipline to build ones portfolio.



Jan 19, 2011




Jan 19, 2011

Nifty will touch 8000 by end 2011!!!
Do you believe it. No.!! Even I do not believe it.
AND EXACTLY THE SAME MANNER I DO NOT BELEIVE THE GOVT.(OR WHAT EVER GOES ON BY THAT NAME IN DELHI) WILL EVEN READ AND IMP[LEMENT THE SUGGESTIONS/ LETTER GIVEN BY NOTED INDUSTRIALIST. I have read the letter in ET. But regret NOTHING will come out of it. Proof:: See todays' Cabinet reshuffle, Can any one minister justify his place. Poor Praful Patel.
Indianc crack jokes on sardars". One is compulsarily occupying one of the highest office in India.
Ram bharose sab chalta hai. And by the way our party leadership is still busy with their Uncle Jinnah.


Sampat Somani

Jan 19, 2011

"I don't read economic forecasts. I don't read the funny papers." - Warren Buffett

You correctly used this should not loose the money..his savings.

You can beat the index by following & understanding the equitymaster. very timely informative write up is great indeed.



Jan 19, 2011

Yes, fully agree with your comments and definitely, we don't need multibaggers to beat the market index if we can find turn around companies( i.e.,with respect to fundamentals).

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