The Secret to Realizing the Potential of Equity Investments

Feb 23, 2016

In this issue:
» Why 'Make in India' is in trouble!
» Japanese savers respond to negative interest rates by hoarding cash
» Market roundup
» ..and more!
Madhu Gupta, Research analyst

'What is the best hedge against inflation?' a friend asked the other day.

When I told her equities offer some of the best long-term returns, she couldn't believe me.

'Stock markets are for large investors who have better access to insider information,' she quipped.

This is one of the myths that has prevented the common man from realising the full power of investing in equities. Unfortunately, as a result, the retail investor is a fringe investor, constituting only 10% of the overall equity market in India.

Institutional players may have the advantage of first-hand company information. But this false sense of moat is like melting ice: Its effect quickly fades away. And the gains are small and short term.

Only through patient, long-term investments in fundamentally sound stocks can one earn large returns.

The power of compounding can multiply returns multi-fold. Warren Buffett owes his wealth to the compounding of the returns on stocks he has held for a very long time. Here's what he has to say about his early successes:

  • The thing is, when I got out of college, I had $9,800, but by the end of 1955, I was up to $127,000. I thought, I'll go back to Omaha, take some college classes, and read a lot - I was going to retire! I figured we could live on $12,000 a year, and off my $127,000 asset base, I could easily make that. I told my wife, 'Compound interest guarantees I'm going to get rich.'

In the Indian equity markets, the following stocks have been multi-baggers over the past decade.

Value compounders over the last decade
  Compounded annual returns (%)
Symphony Ltd. 94.1%
Ajanta Pharma Ltd. 62.0%
Relaxo Footwears Ltd. 60.1%
Caplin Point Laboratories Ltd. 59.9%
La Opala RG Ltd. 58.6%
Vinati Organics Ltd. 57.7%
Eicher Motors Ltd. 55.6%
Kwality Ltd. 53.8%
Bliss GVS Pharma Ltd. 50.0%
Amara Raja Batteries Ltd. 49.3%

Source: Ace Equity

When investors chase only short-term windfall gains, they miss the opportunity to compound their returns.

The success of this strategy lies in zeroing in on businesses with strong moats, robust financials, and efficient management. And once you've found such a business, you must stay invested over the long term to realise the full return.

The ValuePro portfolio is based on Warren Buffett's philosophy of long-term value compounding.

Through this service, investors can invest in good quality stocks that needn't be tracked on a daily basis. To this end, the ValuePro team emphasises studying the inherent strength of the business model. The focus is on consistent, long-term performance and future durability.

Do you believe that the true potential of stocks is unlocked in the long term? Let us know your comments or share your views in the Equitymaster Club.

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2:00 Chart of the Day

Make in India is in trouble. The government's own data says so. As reported in the Business Standard, investment proposals in the industrial sector hit an eleven-year low in 2015. Investment proposals in 2015 amounted to Rs 3,110 bn according to data released by the Department of Industrial Policy and Promotion (DIPP). This was down 23% YoY.

As today's chart shows, the trend is clearly down, with no signs of improvement. Even worse than the amount of investment is the number of proposals. The downtrend in this number is really worrying. From 4,336 proposals in 2010, it fell to 1,998 in 2015. This explains the muted job prospects in India's manufacturing sector.

It's important to note that these numbers reflect only the proposed investments. The actual number will be lower. Then there will be a lag period of a few years before the proposed manufacturing plant is set up and becomes fully operational. This trend does not bode well for the economy. It's especially depressing for the millions of young people who are looking for employment.

Worrying Trend of Declining Investments


Negative interest rate policy (NIRP) is the hot topic in the world of finance these days. Central banks of the developed are a worried lot. If NIRP doesn't work, they could run out of ammunition to stimulate their struggling economies. As per an article in the Wall Street Journal, their concern is justified. The WSJ reports that elderly Japanese savers are buying safes to store cash! This seems to be their response to the Bank of Japan's decision on 29 January to impose a negative benchmark interest rate of -0.1%. This shouldn't really surprise anyone. The world is stuck in a deflationary phase. The more that central banks try to force people to spend, the more they will resist. In that sense, the BoJ's decision could backfire in our view. It is unlikely to help the Japanese economy.


Meanwhile, benchmark indices were trading in the negative today with the Sensex lower by more than 300 points at the time of writing. The BSE Mid cap and BSE Small cap indices were also trading in the red. Amongst sectoral indices, Banking and Realty were hit particularly hard.

4:50 Today's Investing mantra

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst).

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