This is How You Can Beat Everyone in the Market - The 5 Minute WrapUp by Equitymaster
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This is How You Can Beat Everyone in the Market

Aug 20, 2018

Ankit Shah, Research analyst

Two months ago, I'd accompanied a family member to Dadar railway station to help board a long-distance train. We wriggled through the heavily crowded platform no. 4 and made our way to the expected location of the coach.

We had arrived 20 minutes before time. With every passing minute, the crowd swelled on the narrow platform. The crowd was waiting for a train destined to Asangaon, a suburban station on the central line.

When this local train arrived, they pounced on the train like a barbaric mob, scrambling to find a few square inches of space to squeeze in their bodies. Before the train even halted on the station, the compartments were overflowing, with tonnes of people dangling at the door.

We felt intimidated by this sight.

Not that I haven't seen this before. I have... a thousand times over.

And yet this scene intimidates me. Because when I wear the hat of an analyst and imagine what the country's 'demographic dividend disaster' would look like, this is the image that comes to my mind - millions of young passengers jostling and squeezing to get into the country's economic locomotive and the alarming dearth of boggies. But I leave that subject for our big picture editor Vivek Kaul.

There's another scene of action that's getting more and more crowded and competitive - the Indian stock markets. And if you are serious about building long-term wealth, it's important you do a KYC before it's too late.

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Know Your Competition (KYC)

Yes, dear reader, the game of investing is getting intensely competitive.

In an earlier editorial, I'd shown you how domestic investors are making a beeline to invest in Indian equities like never before.

They're all competing with you to grab a share of the wealth-creation opportunity in the Indian stock markets.

To be on top of the game, you ought to keep a check on them and shift your game to the higher gear.

Recently, I came across some compelling data in the SEBI's Handbook of Statistics on the Indian Securities Market 2017.

It showed the city-wise trend in assets under management (AUM) of mutual funds between 31 March 2015 and 31 Dec 2017.

City-Wise Asset Under Management of Mutual Funds
Cities 31-Mar-15 31-Mar-16 31-Mar-17 31-Dec-17 Change (31-March-15 to 31-Dec-17)
Mumbai 456,665 515,302 747,187 802,325 76%
Delhi 156,456 170,563 225,833 267,132 71%
Bangalore 65,850 74,595 101,473 119,588 82%
Chennai 49,597 57,540 81,270 150,135 203%
Kolkata 50,373 56,984 80,210 99,258 97%
Pune 41,691 47,001 67,491 77,877 87%
Ahmedabad 38,457 44,386 52,032 65,217 70%
Hyderabad 20,821 23,452 34,924 45,086 117%
Jaipur 8,760 9,343 12,563 15,261 74%
Vadodara 7,876 8,912 13,222 17,128 117%
Surat 6,578 6,830 10,362 13,199 101%
Kanpur 6,358 6,932 9,766 12,197 92%
Panaji 5,833 5,826 7,904 8,974 54%
Lucknow 5,966 6,866 9,614 13,035 118%
Chandigarh 5,604 6,572 9,467 12,762 128%
Other Cities 155,872 191,719 291,302 407,489 161%
Total 1,082,757 1,232,824 1,754,619 2,126,665 96%
Data Source: SEBI

Here are five interesting patterns and insights that I identified in the table:

  1. Phenomenal Growth in Mutual Fund AUMs - Mutual fund AUM have nearly doubled in less than three years, growing at a compounded annual growth rate (CAGR) of 28%.
  2. Mumbai Rules the Roost - When it comes to mutual fund AUMs, Mumbai - the financial capital of India - alone accounts for 38% of the total AUM as on 31 December 2017.
  3. Top 8 Cities Command Lion's Share - Tier I cities, including Mumbai, Delhi, Hyderabad, Chennai, Bangalore, Pune, Ahmedabad, and Kolkata, reported a growth of 85% in AUM between 31 March 2015 and 31 December 2017. They accounted for 76% of total mutual fund AUM as on 31 December 2017 (in comparison to 81% as on 31 March 2015).
  4. Smaller Cities in High Gear - Tier II and III cities grew AUM by 147% during this period, much faster than the tier I cities. They, correspondingly, increased their share in total AUM from 19% as on 31 March 2015 to 24% on 31 December 2017. This is quite noteworthy. The smaller cities are rapidly lapping up sophisticated investment instruments like mutual funds as the traditional investment avenues like gold and real estate have been poor performers over the last few years.
  5. Demonetisation: The Big Catalyst - While total mutual fund AUM grew at 28% CAGR during the entire period, the highest year-on-year growth rate of 52% came between 31 March 2016 and 31 March 2017. What was special about this year? You must recall that the financial year 2016-17 was the year of Prime Minister Narendra Modi's demonetisation drive. As 99% of the cash in circulation found its way into the banking system post demonetisation, a portion of it found its way into the Indian financial markets. As such, demonetisation can be seen as a major catalyst that triggered the flood of domestic money into the stock markets.

Do you see the big picture here? Let me spell it out for you with the help of the most basic demand-supply equation of economics.

Let's say the stock markets offer us a product called "equity returns". What happens when there are more and more buyers vying for this product and the supply side remaining relatively tight?

You see, the supply of "equity returns" is a function of corporate earnings. And corporate earnings, in turn, are dependent on the overall growth in the economy.

Simply because there is a huge demand for "equity returns" doesn't result in its increased supply.

What happens when demand for a product increases rapidly but its supply is not able to match up? The premium on the product goes up. And correspondingly, buyers receive less value for their money.

This is precisely what has happened in the Indian stock markets. The valuation premiums on stocks have gone up because of the flood of domestic liquidity into the stock markets. But corporate earnings haven't grown as rapidly. As a result, the average market participant must compromise with average or below-average returns. That's basic economics.

But what makes the game of investing exciting is that the distribution of returns for all market participants is not uniform. Some manage to make average gains. Some just manage to safeguard their capital. Some even incur losses. And just a handful of investors make market-beating returns.

Now, it is this exclusive group of successful investors that really excites me. And they're the big winners because they don't do what everyone else is doing.

To beat your competition, you ought to do different things, and you ought to do them differently.

How do you start?

Well I cannot think of any better way to start this journey of consistently beating the market than this book: Equitymaster's Secrets: 2018 Limited Edition.

It contains Equitymaster's 20+ years of wisdom about investing profitably in the stock market. The last time we published this book, more than 20,000 readers claimed a copy for themselves! This time, after updating the book, we've decided to limit the publication to 1,000 copies.

So, don't hesitate dear reader. Grab a copy for yourself today and start beating the competition.

Chart of the Day

I remember a time when market participants would look for cues about the direction of the market by closely following the buying and selling activity of foreign investors. Because at that time, foreign investors played a dominant role in the Indian markets.

But guess what, this has changed. The foreign investors are no more in the driver's seat in the Indian stock markets.

Look at today's chart...

The blue line plots the annual net equity investment by foreign investors, while the red line represents the net equity investments by mutual funds.

Foreign Investors No More in the Driver's Seat

Between FY01 and FY15, the blue line (foreign investors) is consistently above the red line (mutual funds), except in the financial year 2008-09 (FY09). That was the only year in the 15-year period when mutual funds were net buyers in the face of an exodus by foreign investors in the aftermath of the global financial crisis.

But the dominance of foreign investors has been challenged since FY16. The net investments by mutual funds have exceeded foreign investor inflows in two of the last three financial years.

This is the reason why markets have remains relatively buoyant despite the heavy selling by foreign investors in recent months. Had it not been for the steady domestic investor inflows, the markets would have been in a deep correction.

Happy Investing,

Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

PS: Dear reader, click here to claim your virtually free copy of Equitymaster's Secrets: 2018 Limited Edition This book, which includes a special message from Tanushree Banerjee, editor of The 5 Minute WrapUp, will be available only till stocks last! Claim your copy now!

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