Our Secret Strategy that Beats Markets Across Cycles - The 5 Minute WrapUp by Equitymaster
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Our Secret Strategy that Beats Markets Across Cycles

Mar 19, 2016

In this issue:
» This is how you can beat market across cycles
» Savings to earn less... Time to rethink your investment strategy
» Market round-up
Richa Agarwal, Research analyst

Disclaimer: This is not a hiring advertisement.

We are looking for research analysts at Equitymaster.

We have interviewed some candidates. In these interviews, my colleague Rahul Shah always asks the candidate: What is more important to you - the process or the end result?

It's a tough one for the candidates. But given Equitymaster's thrust on processes and discipline in every investment decision, it's critical.

We all know that process is not sacrosanct within the brokerage community. Valuation bands, target prices, and views are changed every quarter. Nothing wrong with that, except that it's based on the latest quarter numbers rather than the long-term picture. In other words, the short-term interests of the analyst community rather than long-term interests of investors. Needless to say, the so-called fundamental analysis is hardly fundamental; it is flexible to suit interests that hardly align with those of investors.

The Equitymaster approach is different. Process rules. Although refined over time, the underlying philosophy is untouched.

Has this approach helped us achieve our desired results? Indeed, it's helped surpass expectations.

Take Microcap Millionaires, headed by Rahul Shah, for example. Since its inception in February 2014, the service has yielded 65.5% compared to the Sensex's 20.2%. It's worth noting that the markets have seen both an up and a down cycle in this period. Irrespective of the market cycles, the service's process is outperforming the Sensex by a wide margin - a fabulous 45.3%.

The philosophy behind the service is based on investing principles outlined by the legendary investor Benjamin Graham in the last few years of his career...principles encompassing the essence of the totality of his experience. The approach was tested over five decades in the US markets, beating the US market returns by almost 100%.

When Rahul and his team back-tested the approach in the Indian markets, it offered four-fold returns - a 320% point-to-point return compared to the Sensex's 40%. Sound logic and a solid track record were the foundation for Microcap Millionaires. It has grown into the best performing service at Equitymaster.

But if you ask me, the process is not the secret of the service's success. It's available to everyone. Every Graham fan would know about it. The key is the discipline to stick to the process, and this is where most investors fail.

But not the Microcap Millionaires team. When the markets were touching lifetime highs some months back, the team went through a long phase without a single fresh recommendation. This was in line with what the process demanded, but it was at the cost of subscriber criticism.

But Rahul and his team didn't budge, and they were vindicated when the markets corrected. Just as the team suspected, not doing anything turned out to be the best thing to do.

The cycle has turned once again. Realism has set in. The markets have corrected. And the time is ripe to make adjustments to the portfolio. From 35%, the portfolio is undergoing reallocation to a 75% position in stocks.

In line with the approach, the team recommended not one, not two, but four stocks last month (Subscription required). And that was just the beginning. Yesterday, Rahul and his team recommended two brand new stocks in the March 2016 issue of Microcap Millionaires (Subscription required). The team is also handholding subscribers through the allocation and rebalancing. Here is your opportunity to join in and be among the first to access the new portfolio...not to mention everything else Microcap Millionaires has to offer. Click here for access to Microcap Millionaires...

Presented with the choice between process and results, we believe the right process is bound to deliver the right results. All it needs is the patience and discipline to stick to it. For those who waited patiently, now is the time to act!

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2:50 Chart of the day

In a move to encourage a lower rate environment, the government yesterday slashed the interest rates on all small savings schemes, including the Public Provident Fund (PPF). The rates on PPF have now been cut from 8.7% (Apr 1, 2015 to Mar 31, 2016) to 8.1% (Apr 1, 2016 to Jun 30, 2016). While the RBI has slowly but gradually been moving towards cutting rates, this latest government move appears to be towards pushing the central bank to reduce rates further. The chart below gives an idea of the change in interest rates for various instruments.

A Big Dent In Small Savings

The other thing that the government has done is to review the rates every quarter rather than every year as was the case earlier. The rational is to align small savings schemes to market rates. So investors who were investing in PPF on the assumption that they were getting better returns will have to re-think their overall investment strategy.

On an overall basis, we believe that there should be a healthy allocation towards each of the asset classes i.e. equities, fixed deposits, gold, PPF, and the like. In the long term, equities have proven to give one of the best returns although risk factors are higher than that of either FDs or PPFs. Thus, your overall investment portfolio has to be aligned in such a way that it takes into account your appetite for risk, and your return expectations.

Now that savings schemes are going to earn less, do you think equities could be a good asset class to take care of your return expectations? Let us know your comments or share your views in the Equitymaster Club.


Barring stock markets in Japan (down 1.3%) and France (down 0.7%), major global indices have closed the week on an encouraging note. Stocks in China and Singapore topped the gainers. The US indices continued to surge for the fifth week in row and for the first time in 2016 closed positive for the year till date.

The US Federal Reserve's dovish stance on interest rates weighed on the dollar. Subsequently, commodity prices too moved up, with crude closing up 5.7% for week. A better US economic outlook and easing recession fears have drawn investors to equities.

Backed by the global rally in markets, the Indian indices also closed the week on a firm note. The BSE Sensex ended the week up 1%. Since Arun Jaitley presented the 2016 budget, foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) have poured US$1.77 billion into the Indian markets.

All sectoral indices ended mixed for the week. Buying interest was witnessed in capital goods, and banking stocks, while pharma, and consumer durables led the losses.

Performance During the Week Ended 18th March, 2016

4:56 Weekend investment mantra

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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1 Responses to "Our Secret Strategy that Beats Markets Across Cycles"


Mar 20, 2016

Hahaha What is going on in Equity Master?Pulling each other up,putting each other down,strategies for raise and promotions haha

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