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What's on Your Investing Platter?

Mar 21, 2016

In this issue:
» India to touch per capita income mark of Rs 1 lac
» What does proposed reduction in corporate tax rates mean?
» ...and more!
0.00
Tanushree Banerjee, Co-Head of Research

One night I dreamt of having employed Benjamin Graham, Warren Buffett, and Peter Lynch to build stock portfolios for me. My mandate was clear. Each had to use his specific skills and try to optimise his respective portfolio returns. That too across market cycles and over long periods.

Am I joking? Of course, I am!

But seriously, would you have refused Graham, Buffett, and Lynch if they were to offer you their services?

Would you refuse Lynch because Graham was building a value portfolio for you? Or Graham because you consider yourself a growth investor like Lynch?

Let me take a guess. You would accept their services and simply ask them to do their best.

Even if they aren't managed by investing legends, I certainly wouldn't mind having independent different portfolios that embrace three different stock selection systems. As long as I am convinced that the systems actually work and that each stock is selected with the requirements of the system in mind. The risk and the returns for each of the portfolios may be different. But as long as the systems meet my core criteria - of optimising returns across market cycles and over long periods - I am good.

I think of it this way...

I prefer variety on my food platter during the week, as long as it is healthy. Similarly, there is no reason for me to refuse a stock selection system that makes sense to me, has a track record to back it, and can be implemented diligently.

The problem is that many investors typecast themselves and their stocks.

I find it rather amusing when subscribers write in to us asking whether we are digressing from our goal of offering them 'value stocks'. They tell us that they are too 'Buffetteer' or 'Grahamian' to take anything but value stocks. Now, these are nothing but fancy heuristics coined by investors wanting to classify themselves in the same pool as their investing idol.

First of all, at Equitymaster, our goal is not to offer value stocks. Instead, it is to follow the principles of value investing to look for stocks that create long-term shareholder wealth relatively safely. Needless to say, the principles are inspired by the value investing legends and their style of stock picking.

So we could have a system that does this by watching price-to-book values.

Or a system that watches price-to-earnings growth.

Just as the star fund managers have different teams running different funds for them, we have different teams looking into different value investing process and systems.

And we don't think this is digression from our goal. As long as a certain style of value investing makes complete sense to us and has an enviable track record or throws up very encouraging back-test results, we don't hesitate. We think it is our job to offer you variety for your investing platter...yet strictly ensuring that everything on offer is great for your portfolio's overall health. After that, it is for you to pick and choose.

As with food, it is important to develop an appetite and curiosity for healthy investing. Your appetite should extend to great books on investing and the insights and knowledge of great and successful businesses. You need a big appetite to study the makings of billion dollar businesses over decades. With such an appetite, you will be ready to devour your investing platter!

Do you think being open to different stock selection processes could help you optimize returns across market cycles? Let us know your comments or share your views in the Equitymaster Club.


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2.42 Chart of the day

In a nation where population crosses a billion mark, per capita income is an important metric to track. If the statistics are anything to go by, we aren't doing that bad. We are likely to touch the threshold of Rs 1 lac per person soon, given the GDP growth assumption and expected growth in population.

The data is heartening. But statistics hardly tell enough in absolute terms. If you compare with other nations, India has a long way to go. This is because on GDP per capita basis, India ranks quite low when compared to economies like USA, China...in fact lower than Indonesia and South Africa (Source: World Bank, 2014).

Further, as an article in Economic Times suggests, it does not reflect the disparity in incomes across different classes. There is a huge gap in the standard of living between urban and rural India that needs to be bridged. Not to mention that these levels do not give even an average urban Indian enough comfort to buy basic need - makaan for himself. As an investor, we would suggest you to be very cautious before arriving at conclusions on macroeconomic picture on the basis of such statistics.

Per Capita Income in India To Cross Rs 1 lac Mark

3:45

Talking of disparities, the proposed reduction in corporate taxes is likely to correct some anomaly in profits and tax liabilities that exists between small profit companies (that pay higher tax) and big profit companies. The budget proposal to lower corporate tax rate over the next four years, along with phased removal of exemptions, is likely to shift the balance in favor of companies that earn less but end up paying more tax.

As suggested in an article in The Hindu, India's basic corporate tax at 30% is higher than rates in other Asian economies. And yet, the effective collection is just 23%. This not only leads to lower collections, but makes domestic economy uncompetitive. The proposed move as such, if implemented well, is likely to lead to higher tax collections. At the same time, it will iron out some distortions in the taxation system where tax benefits are asymmetrically reaped by big companies.

4:48

After opening the day in the green, the Indian markets have continued to trade on a positive note during the post-noon trading session. Sectoral indices are trading firm with stocks from the realty, FMCG, and telecom sectors leading the gains.

The BSE Sensex is trading up 132 points (up 0.5%) and the NSE Nifty is trading up 39 points (up 0.5%). The BSE Mid Cap index is trading up 0.7%, while the BSE Small Cap index is trading up by 0.9%.

4:50 Today's investing Mantra

"You only have to do a very few things right in your life so long as you don't do too many things wrong." - Warren Buffett

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

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