Was this the 'buy and forget' portfolio of last decade?

Dec 24, 2012

In this issue:
» The start of financial deglobalisation
» Is it worth fighting the central bank?
» China vouches for rural reforms
» Have BRIC markets lost their sheen?
» ...and more!

00:00
 Chart of the day
 
BSE-Sensex at 3352. Yes, you would have been reading exactly this if we had had an issue of The 5 Minute Wrapup on December 24, 2002. A decade down the line, much water seems to have flowed under the bridge. Indian capital markets have undergone a sea change and thousands of more stocks have got listed. Meanwhile, the BSE Sensex itself has gone up 575% to touch 19,200 odd levels. That makes it compounded average annual returns of 19.1% in 10 years. Staying invested in Sensex stocks alone has therefore undoubtedly reaped rich dividends. But what about those who chose to create a wider portfolio?

Periods of bull run, recession, economic crisis, scams, bankruptcies and bailouts. Those who have been investing since the start of this decade have seen it all. No doubt it must have been a heady task for them to stick to a select group of stocks in the hope of becoming wealthy. In other words, to maintain a 'buy and forget' portfolio.

We were rather intrigued when we looked at the biggest multibaggers from BSE 100 over the past decade. The list was a mix of 'must haves' and 'rather avoid' when one intends to forget the stocks for a good ten years. The top 20 stocks offered very handsome CAGR of around 40% in ten years. Notably this is double the Sensex' returns. But while Equitymaster itself had vouched for the likes of Titan, L&T, Sun Pharma and Godrej Consumer (GCPL) through StockSelect recommendations in 2002, many others did not meet our investing criterions for long. Some have not yet been able to meet those yet and probably never will.

Thus a 'buy and forget' portfolio that one creates based on strict fundamental criteria need not produce all market beating gems. What it needs to produce is a bunch of stocks that preserve wealth with a few of them turning out to be real gems. Asian Paints, Dabur, HDFC Bank, that do not feature in the list of top 20, have also been our favourites for almost a decade. The CAGR from these too exceed 30%.

To drive home the point, selecting stocks that you wish to buy and forget needs to be a very careful and well researched task. Even then not every stock in that portfolio would turn out to become the biggest multibaggers. All you need to make sure is that you keep the likes of Mahindra Satyam (a popular stock in 2002) out.

We therefore certainly do not think that every stock in this list of 10 year multibaggers could have been a part of 'buy and forget' portfolio in 2002. For the next decade too we would rather bet on sound and resilient stories that fetch reasonable risk and inflation adjusted returns.

Data source: Ace Equity

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01:40
 
The concept of buying a stock at a PE multiple of 100 may be sacrilege for value investors. But there's a school of thought out there that does not hesitate in giving a stamp of approval to this philosophy. Of course with the caveat that the stock has to be in the midst of an upward swing. In other words, this school of thought simply believes in buying what is going up and selling what is going down. Fundamentals be damned as per them.

Thus, if these investors are contemplating their next move, noted investor Mohammed El-Erian of PIMCO has a word of advice for them. He is asking them to do exactly what the world's central banks are doing. To put it differently, El-Erian is advising them to not fight the central banks. He could well be correct. Central bankers around the world are men with a mission. They just don't care how much money they are printing. All they want is for asset prices to go up. Thus, anybody wanting to bet against them is living in a fool's paradise we believe. For he simply doesn't have the same liquidity at his disposal that the central banks have. Hence, taking an opposite position to that of the central banks in a trade would be a sure shot ticket to the poorhouse.

As far as value investors are concerned, all they need to do is keep their greed under check. They will certainly not come anywhere close to buying a high PE stock. But they are likely to be misled into buying a low PE stock where the multiple was low only because of a temporary boost to earnings. In other words, they should be mindful of value traps disguised as value opportunities.

02:05
 
The dragon nation, China has witnessed spectacular growth till recently. Its per capita income for urban dwellers has gone up by nearly 13% in 2012 (first nine months). But the urban-rural income divide has become even larger. At the end of September 2012, the urban per capita income stood at three times that of the rural side. To bridge this gap, the government now plans to come up with a set of rural reforms. The reforms would be centered on ensuring that the rural population also gets a fair share of China's economic growth. It is good to see policy makers finally wake up to the problem of income divide. In fact income divide is the root cause for social unrest. As per Bloomberg, China's income divide is dangerously close to levels that could spark social unrest. Whatever the motivation for the reforms, the bottom line remains the same. If a country wishes to continue growing at a spectacular pace, it has to ensure that the growth is all inclusive. Growth limited to one section of the society is not a sustainable model in the long run.

02:35
 
Before the financial crisis of 2008 broke out, globalisation had become the buzz word in the world economy. Of course, cross border trade is a phenomenon as old as the hills. But the quarter century preceding the financial crisis witnessed an unparalleled rise in globalisation. This period was marked by brisk growth of cross-border financial flows. On one hand, the developed Western economies fuelled investments into emerging economies such as China as well the other BRICS. At the same time, emerging economies voraciously acquired assets in the developed economies.

All of this has gone for a toss since the crisis. Cross-border lending has gone down significantly. Several large global banks have scaled themselves down. In a sense, things seem to be in a reverse trend. Does this mean the start of financial deglobalisation? To some extent, the reverse trend was inevitable. All excesses tend to get corrected over time. Several European regulators have turned to financial protectionism. This has led to liquidity pull-back from overseas markets to protect the parent bank. Even the US regulators have been insisting on setting up of local subsidiaries with separate capitalisation. Such conservatism is typical of any post-crisis era. These measures will certainly have adverse repercussions. Liquidity and capital tend to get locked in where they are not needed. This means wastage of capital. As such, we think financial deglobalisation is a corrective trend. The smart money will find its way back to optimal utilisation once things begin to normalise.

03:12
 
Has the sheen worn off the BRICs markets? Indeed, the stock markets in countries such as China, Brazil and the like have been at the receiving end in the past one year. This is in contrast to when the global crisis struck in 2008. At that time the developed world sunk into recession. In the meanwhile, growth in BRIC regions soared sending investors flocking to these regions. The past year has been different. Growth in these regions is still higher than that in the developed world. But the pace has slowed down as a result of which equity markets have seen a plunge. China, for instance, has been trying to curb bubble formation in property. India is dealing with slowdown in growth and high inflation. Does that mean that lower valuations in these countries now would signal a rebound in 2013? It all depends. Assuming that the economic environment in the US and Europe does not improve and that in the BRIC countries does, a rally in the markets could very well be on the cards.

03:42
 
Which is the ubiquitous Indian brand? Something that is homegrown but yet known all over the world? Well, according to ~b~top CEOs across the globe, the Tatas is India's best known global brand.~/b~ The US$ 100 bn salt to airlines manufacturer has really carved a name for itself in the global market. The group was started in 1868 by Jamsetji N Tata and has now become one of the biggest success stories from India Inc. The group has interests in diverse sectors such as Steel, automotives, Chemicals, telecommunication, Information Technology, beverages, hospitality, etc. ~link~~path~http://m.equitymaster.com/Details.aspx?Type=5MIN&date=12/08/2012&StoryNo=3&title=Ratan-Tata-blames-the-government~/path~Ratan Tata~/link~ has been responsible for making this family owned business into a professionally managed conglomerate. He is finally stepping down at the end of this year after a 21 year reign at the helm. Cyrus Mistry will now take over the ropes. One of the biggest challenges for him will be ensuring that all the group companies successfully steer through the economic slowdown globally. We wish him all the very best. But since most of the horses in his stable are winners, we don't think he will face too much trouble.

04:35
 
Buying interest in auto, IT, pharma and FMCG stocks kept the benchmark indices in Indian equity markets firm throughout the trading session today. The BSE Sensex was trading higher by around 52 points at the time of writing. Other major Asian markets closed higher while Europe also opened flat to positive.

04:50
 Today's investing mantra
"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a mispriced bet - that they can occasionally find one.

And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time they don't. It's just that simple." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'

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2 Responses to "Was this the 'buy and forget' portfolio of last decade?"

praveen

Dec 27, 2012

please note:- 90% of those were mid cap in 2002, so message is clear- buy good quality midcap and forget.Out of 20, seven are commodity stock..surprise? another surprise- no IT in the list?? not even infy,the multibaggger of previous decade???....3 pharma, 2 banks, 2 auto companies...So buy midcaps with 6-7 sectorial diversification....You may beat index...who knows?

Like (3)

B S MURTHY

Dec 24, 2012

Predicting the future life of stocks for a decade in advance can not be guaranteed. Some stocks may definitely fail. When Satyam Computers has gone down to Rs.6/- due to scam, how many people could guess that would touch R.100/-?(current trend). Many people could not guess that Global Trust Bank scrip would become a scrap. They lost some thing or more.
During the last 10 years many scrips have become junk. SEBI is not an Insurance Company to ensure the corporate life. It does not even work like a Doctor attending post mortem on the dead bodies.

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