Is this the best investment strategy out there?

Aug 17, 2011

In this issue:
» IT industry staring at an era of low margins
» CCI slaps a huge fine on DLF
» Buffett wants US Government to tax the super rich more
» Can China drive global growth on its own?
» ...and more!

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There have been many periods in history where even the best investors have suffered significant losses. But perhaps the scars of the year 2008 run deeper and wider than any other time in recent memory. There was barely an investor who came out of the other side of the year with his capital intact. And irreversible losses were the order of the day. It is not just ordinary investors who struggled but a lot of high profile, successful investors also got caught in the whirlpool. Thus, all of this begs a very important question. How did so many people commit the same mistake all at once?

We believe that the guys who suffered irreversible losses were the victims of an important error. Their investment strategy seemed to be formulated in such a way that it worked only under certain circumstances. Thus, when the circumstances changed way beyond one's imagination, the strategy failed big time and the investors suffered irreparable damage to their portfolios.

Sadly, we don't seem to have learned much from this entire episode. Majority of the investors still follow an investment strategy that is suited to only a certain type of economic environment. And what more, they appear hooked on to the idea that as economic environment changes, the change of strategy can also be perfectly timed to suit the environment. Thus, when interest rates are low, they tend to stick to cyclicals and interest rate sensitive sectors. And when they are high, they try and move into defensive sectors such as FMCG and pharma.

We are of the view that this is an utterly wrong thing to do. Firstly, investment strategy should be such that it should work in all environments. Secondly, it is almost impossible to time the economic cycles and hence, changing one's strategy to suit the environment is not likely to be profitable either. Thus, having a universal and a timeless investment strategy is the best approach as far as we are concerned.

And what is this universal strategy? Well, it consists of nothing but investing in stocks that have at least a 10 year history of generating above average returns and are run by honest and sensible management. Furthermore, the stocks should be reasonably valued from a long term perspective. Follow this approach and there still might be years where losses are suffered. But there is a very slim chance that those losses will cause permanent damage. And over the long term, above average returns are almost certain to accrue.

Do you think the investment strategy outlined above makes sense? Share your views with us or comment on our Facebook page.

 Chart of the day
Infrastructure stocks could be taking a severe beating on the bourses but they still seem to be hot property with private equity firms. As today's chart of the day shows, the infrastructure space accounted for a lion's share of total PE investments in India in the month gone by. Such was the magnitude that even when the next five sectors on the list were combined, it still could not match the sum poured into infrastructure. A good sign indeed as the country could certainly do with more investments in the infra space given the deficiency staring it in the face.

Source: Live Mint

The Indian IT industry has been the apple of investors' eyes for quite some time. The industry's spectacular growth rate was one reason. But a bigger attraction was the high margin that the top players were earning. Companies like TCS and Infosys have been earning margins in the range of 27% to 30%, every year historically. But unfortunately it looks like good times have come to an end. With increasing competition and higher costs, the days of high margins for the IT industry appear to be numbered. Sector companies have faced higher costs related to employees as they are unable to delink their revenues from people. As a result, to earn higher revenues, they have to invest more in people resources. At the same time, issues like currency volatility, higher visa fee will exert more pressure on the cost structure. Combine this with the fact that the global crisis has clouded client companies, thus forcing pricing to either stagnate at current levels or come down in extreme cases. The combination of increased costs and lower prices would mean lower margins. It is a simple math!

Think real estate and you think of unfair business practices. In fact, it would not be wrong to label real estate as the official poster boy of the corrupt business practices prevalent in India Inc at the moment. Strong political-builder nexus prevalent here means that consumer rights of the buyers have more often than not been compromised. However, an exception does deserve a mention.

Recently, Competition Commission of India (CCI) imposed a fine of Rs 6.3 bn on DLF for resorting to unfair business practices and violating consumer rights. We believe that this move is likely to have wider implications in the way the industry functions at the moment. For buyers who are mostly bullied and are given fake assurances while entering into an agreement, this ruling has certainly come as a ray of hope. While CCI can act as a watchdog, we believe what India needs at the moment is a real estate regulator who can oversee the entire functioning of the industry. It will not only eradicate corruption but would also bring in a lot of transparency. However, considering that the political parties have strong vested interests in the sector, it is anybody's guess as to when we would see an official regulatory body in place.

It is now a well documented fact that the US is grappling with prolonged recession that has stifled growth and job creation in the country. So much so that the unemployment rate in the country has remained high for quite some time now. But the people who are seriously suffering are the poor and the middle class. The rich Americans have not really seen a significant change in their lifestyle as a result of the crisis and this has led to an increasing economic divide between the classes. Which is why legendary investor Warren Buffett is of the view that the US Congress needs to stop coddling the super rich and to tax them higher.

Buffett has cited his own example regarding this. For instance, last year Buffett paid only 17.4% of his taxable income whereas a lot of people in his office had to contend with tax burdens ranging from 33% to 41%. Indeed, the legendary investor has further gone on to add that back in the 1980s and 1990s, tax rates for the rich were far higher. And higher rates hardly hurt job creation as a net of nearly 40 m jobs were added between 1980 and 2000. Moreover, Buffett contends, investors have never really let the taxation aspect deter them from making good investments. Hence, he believes that while tax benefits could be given to the middle class and the poor in America, the government should certainly not shy away from taxing the rich more. Makes sense, we believe.

The so-called economic recovery of the developed economies was absolutely fake. The US and the European countries are sagging under the burden of debt and slowing economic growth. With the outlook for the global economy looking increasingly bleak, the question is whether there is any economy that can lift the world out of the mess. China, the fastest growing giant immediately comes to mind.

So far, China has lent trillions of dollars to the US. The story is almost akin to the analogy of a shopkeeper selling you products and also offering you credit to buy the same. This has created an enormous imbalance between the lender and borrower. What should China do in such a case? We believe it's time China turns the cycle the other way. Instead of lending endlessly to the US, it should import more and make productive overseas investments. By importing more, China would give the indebted countries a way to wriggle their way out of debt. At the same time, China could boost the purchasing power of its people and thus improve their standard of living.

But as they say, it's easier said than done. This kind of shift will require a complete overhaul of Chinese economic policy. So though this seems perfect in theory, whether or not it will happen is anybody's guess. Till then, all hopes of a quick global recovery stay adjourned.

Meanwhile, indices in the Indian stock market are behaving quite volatile today with the Sensex trading higher by around 75 points at the time of writing. Heavyweights like Infosys and HDFC were seen driving most of the gains. While most Asian stocks also closed strong today, Europe has opened on a negative note.

 Today's investing mantra
"There are plenty of ways to get ahead. The first is so basic I'm almost embarrassed to say it: spend less than you earn." - Paul Clitheroe

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8 Responses to "Is this the best investment strategy out there?"

Girish D

Aug 18, 2013

People have commented on 2008 like situation and thye are telling us why long term approach is not good. My response to them is...if you are not willing to ignore prices for next 3 years then you should not invest in stock market in the first place. You are not investor but speculator looking for gretaer fool OR you have psychological need to have market approval (in price appreciation) for your decision to invest in that stock. Both indicate you are a 'weak hand'.
For these so called investors I have a question...when you own a business do you worry about growth, margins, dividends, market trend etc OR you worry about how much you can sell for every day you get up in the morning? Real owners and investors do not think of selling price every day. They know that if the fundamentals are in tact then they can sell the business at reasonable profit sooner or later. They also know that the business value is growring every year if fundamentals are growing. And they need not worry whether price is Rs 20 per share or Rs 20.50 because they started with Rs 2 per share and now looking at 10 times appreciation. Pennies do not count in such scenario unlike speculative ventures.


parimal shah

Aug 17, 2013

I fully agree with 10 year performance & good management criteria. In this context, I feel the advance Stock screener has to have an option for 10 year period as well (at present max it is max 5 years; 10 year option is not available).



Aug 18, 2011

Buy and Hold is good if one is in a secular bull market. Like for example India appears to be for the past 8 years (2003-2011) and likely to be over the coming 10-15 years. If one is not in a secular bull one will need to be more nimble. Buy and Sell in 2-5 year cycles. My personal startegy is to go aggressive when I hear of layoffs, and start selling when I hear too much of talk of Sensex 100,000 or any such absurd number. Also when a leading general purpose magazine (like India today) does a cover on how great the sensex is, or movies come out like SaaS & Sensex. Remember dot com, remember 2007. This works.

Very Long term, the only thing that makes me extremely weary of the India Growth Story is that there is near unanimity that we are in a golden period for equities. Such unanimity in itself is bearish. Lets see how things unfold........


k rohidas

Aug 17, 2011

No sir, your suggestion is as bad as other suggestions one can come up with. You talk about companies that have existed for long period of time and have had solid performances. How about General Motors in USA?. Does it fill the bill?? In an environment where Governments everywhere interfere and try to control economic activites including equity markets, only a speculator or God himself can hope to succeed - all other 'strategies" have same certainty as flipping of a coin. How can you read Govt's mind whether they will keep interest rates low to zero for an extended period or one morning hike to oover 5%? Whether they will print currency by tons or incur new debts by truckloads?. How on earth can one predict these moves?
K Rohidas



Aug 17, 2011

My own experience in last 22 years is that one needs patience in this share market. Long term strategies bear good fruits.Normally investors go by heard mentality.Success depends on swiming against current. Markets runs 6 months ahead of actual happenings.So BUY when others are selling heavily & SELL when everybody is buying ! It is difficult to strictly adhear to however as a general rule it works.One more thing to convey that BOOK PROFIT IF SCRIP DOUBLES FROM YOUR BUY PRICE. sell 50% - so your investment is NIL, dosent matter remaining 50% goes up or down , you need not have to worry.



Aug 17, 2011

I don't think even holding fundamentally good companies will help in 2008 like situation. The need is to be able to move across asset classes. Why should the money be 90-100% in equity when every stock is going down? Market will never indicate a clear top or bottom but there will always be signs suggesting change in asset allocation.



Aug 17, 2011

Simple phenomenon capable of generating superior returns. Also we can emphasise on having not more than 20 stocks in the portfolio.


Manish Sehgal

Aug 17, 2011

The strategy shown in the article is good. Companies with good track records which have shown growth, cash generation etc over a longer duration of time are the ones which should be picked up for investing. But one doubt is what do we mean by average returns.

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