»5 Minute Wrap Up by Equitymaster

On This Day - 21 JULY 2016
Pokemon Go: Not a Game Changer for Investors

In this issue:
» SME IPOs cashing in on the frenzy
» One positive fallout of Brexit on emerging market stocks
» ...and more!
Rahul Shah, Co-Head of Research

Pokemon has taken the gaming world by storm once again. This is nearly 21 years after Nintendo released the first video game. And now Pokemon Go is the most popular smartphone game in history.

Pokemon's popularity isn't the only thing surging. Co-creator Nintendo's stock price has taken off like a rocket. The firm's market capitalisation has more than doubled in seven trading sessions flat. For perspective, Nintendo is now more valuable than its archrival, consumer electronics giant Sony Corp.

But is such a huge leap of faith in the future of Nintendo justified? Should investors corner as many shares as they can get no matter the price?

Imagine you are the CEO of a company. You're a significant player, but the industry is very competitive. Most years, you barely earn enough to cover all your costs (including the cost of capital).

Then one fine day, a revolutionary new equipment comes into the market. Its productivity is unlike anything the industry has seen before. It has the potential to cut your labour costs 50%. Your operations and finance team is already out with rosy projections. They tell you all you need to do is invest in a few of these beauties and your profits and return on capital will never be the same. They persuade you to take the plunge. But you might be in for a rude shock...

The new equipment could certainly help you rake in the money...for a year or two. No sooner than your competitors get a whiff, they too invest in the new equipment, all at once. And guess what - they cut their prices. They'd rather pass the savings onto the end users, who command a significant clout in the market. You're forced to follow suit, and it's back to square one.

Now, what we've just described, the first-mover advantage, is often confused with long-term competitive advantage. The first-mover advantage in the case of new equipment isn't a game changer if your competition can easily follow suit. Because eventually they will. The advantage is short-lived.

Long-term competitive advantage, on the other hand, creates an entry barrier. This barrier makes it difficult for the competitor to copy, which helps preserve the high profitability and return on capital the move brings about.

How does all this concern Pokemon Go? Well, the success of the game seems to stem more from a first-mover advantage than a long-term competitive advantage.

A big reason Pokemon Go is so successful is because it's the first big attempt at a concept known as augmented reality. While novel, the technology isn't out of bounds for competitors. Competition will surely arise, and all the rosy projections currently driving Nintendo shares could come to naught. And that's why we believe making a beeline for them, especially at current valuations, could be fraught with risks.

In fact, as per some back of the envelope calculations, Nintendo's share price jump only makes sense if the app is downloaded by every second person on planet Earth.

With any new advancement, we suggest you always assess whether the benefit is a first-mover or a long-term advantage.

Do you think Pokemon Go is simply a fad and a first-mover advantage that will bring no real long-term benefits to its creators? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
The Way To Small Caps

For eight years, we at Equitymaster have made it our business to find solid small caps...

And what do we have to show for our effort?

Recommendations that generated returns like 250% in 2 years, 217% in 3 years 11 months, 288% in 2 years 5 months, 133% in 1 year 3 months!

Of course, past performance does not guarantee future returns...And you need to keep that in mind.

But the fact remains our research process remains the same...

And now you too could receive our recommendations...

Interested? Click here to know more...

Just yesterday as part of the premium edition of The 5 Minute WrapUp, we wrote to you about the sharp rise in Indian markets over the last few months. This, despite Brexit referendum ending with a negative outcome. So, what gives?

A recent survey of global fund managers by Bank of America Merrill Lynch gives a clue. It points out that two thirds of such investors expect additional monetary easing from the Bank of Japan. Further, 39% of fund managers expect a major central bank to announce a policy of 'helicopter money' over the next year or so.

But that's not all that is driving the markets. It seems Brexit has had another effect too. It has driven such investors away from European stocks and towards US and emerging market stocks. Today's chart of the day illustrates how this trend has played out over the last year.

Brexit Drives Global Fund Managers towards Emerging Markets


Talking of rising markets, a very predictable side-effect of such markets is back - an increasingly buoyant initial public offering (IPO) market. But as per a report in daily Business Line, this is not restricted to only large mainstream IPOs. Share sales of smaller companies on the dedicated SME (Small and Medium Enterprises) segments of stock exchanges are also seeing a lot of action.

All the companies that have listed here since April - 13 in all - have been oversubscribed. Further, eight of these are now above their IPO price. Rising markets are an IPO's best friend indeed.


You've heard about Sensex 40,000 from us.

We have been writing about it very regularly in The 5 Minute Wrapup and Research Digest.

We did not pull that number out of a hat. Rather it came after constantly tracking the long term performance of hundreds of listed companies over all these years. Our research has revealed some key reasons the 70% earnings upside in Sensex can be for real.

Investing in the best businesses before their earnings surge becomes evident in financial performance gives an edge both in terms of margin of safety and return potential.

Make no mistake. Just like stock prices, corporate profits are never linear. There will be temporary hiccups on the way up. But the most robust businesses and safest stocks will outshine their past track record in the years to come.

The StockSelect team has released their special report - Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave.

These are businesses that not only offer comfort in terms of fundamentals and management quality, but are also the ones that we believe will capture the earnings growth opportunity faster than others. And the upside in their earnings potential is so visible that most macro headwinds will hardly impact them.


We'd also like to tell you about a fabulous gift the Common Sense Living team is offering...

11 Secrets to Building Wealth...completely free

At Common Sense Living, Mark Ford and the team bring you many different ideas to make your life richer and fuller. Mark Ford is an entrepreneur, author, and wealth coach to many thousands across the world. He has developed unique ideas...drawn from his own life experiences...on how to build wealth. Mark not only shows you how to grow your wealth; he helps you do what you really want to do in life...to follow your dreams and fulfil your goals.

What we like best about Mark is that he puts his ideas in context; he makes them relevant and easy to use and provides great illustrations to explain them... And now Mark and the Common Sense Living team want to reveal 11 of Mark's most valuable wealth-building secrets. These are ideas you can use for your own your wealth-building journey. Grab your free copy of Mark Ford's 11 Secrets to Building Wealth.


In the meanwhile, stock markets were trading on the weaker side today. At the time of writing, the BSE Sensex was trading lower by 90 points with power and banking stock leading the declines.

04:50 Today's investment mantra

"Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere." - Warren Buffett

Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

For the terms and conditions for research reports click here.

Details of Associates are available here.

  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Equitymaster has financial interest in Bajaj Auto & Hero Motorcorp.
  3. Equitymaster's investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
  4. Equitymaster's Associate has financial interest in Mahindra and Mahindra
  5. Equitymaster's Research Analyst or his/her relative have no financial interest in the subject company.
  6. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  7. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407