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Did You Lose Money on My Recommendation?

Apr 14, 2016

In this issue:
» Monsoon prediction versus the reality
» Ecommerce biggies run into trouble with valuations?
» ...and more!
0:00
Rahul Shah, Co-Head of Research

If there's one thing our subscribers hate the most, it's losing money on a stock.

Each time investors buy a stock, they go in with the expectation that the stock will deliver great returns. And that these returns will help them create wealth. So naturally, when a stock doesn't deliver, disappointment is quick to set in. And doubt.

But you see, it just doesn't work that way!

I've learned this from Benjamin Graham. And in my twelve years of experience, I've seen it play out over and over again: Profitable investing is not about picking winning stocks. It's about expecting the losers, and factoring them into your stock-picking strategy.

A little over two years back, I created a service called Microcap Millionaires (MCM) that takes precisely this approach to equity investing.

And, promptly enough, in came the losers.

As of yesterday, eight stocks I've recommended over the course of these two years are below their recommendation price. And I've had numerous ruffled subscribers write in to me complaining about them.

'Wasn't it obvious that this was not a good stock?'

'How could you recommend XYZ Ltd? Didn't you do your research properly?'

But here's the thing. There will be a few losers. Despite having all of the fundamentals in place, a few investments will turn sour. There's no escaping that. Worse, it's hard to know which ones will turn out to be the losers.

But once you realise this hard truth, something really great happens: You begin to build it into your calculations. You become stricter and more disciplined when buying stocks. You buy them at a price that, even when a few go down, the gains more than make up for the losses. With this group of stocks, you still come out on top.

It is this portfolio-based approach that MCM takes.

And this is exactly how it has turned out. Here's the proof:

  Position Returns as of
13th April, 2016
Stock #1 Open 75%
Stock #2 Open -1%
Stock #3 Open -23%
Stock #4 Open -12%
Stock #5 Open -41%
Stock #6 Open -18%
Stock #7 Open -6%
Stock #8 Open 12%
Stock #9 Open 91%
Stock #10 Open 2%
Stock #11 Open 14%
Stock #12 Open 5%
Stock #13 Open 22%
Stock #14 Open 25%
Stock #15 Open 11%
Stock #16 Open 20%
Stock #17 Closed 170%
Stock #18 Closed 170%
Stock #19 Closed -58%
Stock #20 Closed 51%
Stock #21 Closed 545%
Stock #22 Closed 34%
Stock #23 Closed 135%
Stock #24 Closed -39%
Stock #25 Closed 12%
Stock #26 Closed 59%
Stock #27 Closed 100%
Stock #28 Closed 150%
Stock #29 Closed 176%
Stock #30 Closed 107%
Average gain 60%

For the 8 MCM stocks that have lost money over this period, the other 22 picks were money makers. And with gains of well over 100% in 8 of these stocks, the gains have made up for the losses by a nifty margin. A margin so high in fact that the overall returns from the service (since its inception in February 2014) have beaten the returns from the BSE Sensex by a factor of more than 3 times.

And that, I believe, is what a successful stock-picking strategy is all about! And I'd love you to join me on this journey as I look forward to many more such years of solid wealth creation...

Do you think taking such a group approach to stock picking is the essence of good returns from stocks? Let us know your comments or share your views in the Equitymaster Club.


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2:38 Chart of the day

Looks like things have started to fall into place as far as uptick in the economy is concerned. Crude oil prices are benign, commodities are trading at multi year lows, inflation is subdued and now, interest rates have also started falling. The proverbial icing on the cake however was provided by the Indian Meteorological Department (IMD) a couple of days back. IMD has said that the monsoon this year is expected to be above normal. As per a leading business daily, this is the first time since 1999 that department has made an 'above normal' prediction.

As the chart of the day highlights, the first forecast made by the IMD has deviated a bit from the actual monsoon in each of the past five years. Thankfully though, the deviation hasn't been much and in some cases, the actual monsoon has actually turned out better than the first forecasts. However, given IMD's prediction for this year, the actual rains don't really have to beat the forecasts to make it a great monsoon year. Even if the forecasts are matched, the economy is likely to receive a great boost.

Monsoon prediction vs the reality

3:15

Have ecommerce giants like Flipkart and Snapdeal run into valuation troubles? At least this is what a leading business daily seems to be indicating. As per the daily, both these firms are finding it difficult to raise more money at the current valuations.

It is quite interesting how the tables have turned. Up until the middle of the last year, it was the ecommerce companies that were calling the shots and investors lining up at their doors. And then the whole global concerns held center-stage and big question marks emerged over unproven business models. One of the fall outs of this was a big brokerage coming out and slashing Flipkart's valuations by close to 30%.

In fact, we've mentioned a few times in the past as to why the business models of companies like Flipkart and Snapdeal don't make sense to us just yet. Most of these companies are still burning cash and there is no clarity as to when the profits can actually start coming in.

While both these companies have termed the latest news as false and baseless, we won't be surprised if there is an element of truth in it. We will have to wait and watch as to what actually transpires.

4:10

22 April 2016 is coming close. By now you know that we will be celebrating our 20th anniversary. It is a time of ruminations and on this occasion, we'd love to hear from you. In case you wish to share your experience with Equitymaster or read what some of our valued long time subscribers have to say about us, please do so here.

Here's what Ravindran K. P, an Equitymaster Wealth Alliance Member and a subscriber since 2005 from Kerala, had to say about his experience with Equitymaster:

  • "CONGRATULATIONS"
  • On this auspicious occasion of celebrating Equitymaster's 20th Anniversary, I wish your entire team for their dedicated endeavors to keep Equitymaster most reliable and highly professional, and it's my privilege to be a lifetime subscriber of Equitymaster.
  • Also, would like to express my appreciation for your detailed analysis and brilliant recommendations through Wealth Alliance, ValuePro and other detailed analysis, handy and well organized portfolio, etc., enable me very much for selecting quality scrips comfortably and make good returns.
  • Thanks again and wish your entire crew every success and all the best throughout years ahead.
4:40

IT biggie Infosys' results will be out tomorrow, and we will be putting up a detailed analysis of the company's performance. This will also kick off the March quarter earnings season, so be sure not to miss out on all the action. Though we do not lay too much emphasis on quarterly results, it does do a great job of helping keep an ongoing tab on companies' earnings performance.

4:56 Todays' Investment mantra

"In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten". - Peter Lynch

Editor's note: There will be no issue of The 5 Minute Wrapup on 15th and 16th April 2016.

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
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.

BUSINESS ACTIVITY:
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Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. 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.
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  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.
GENERAL DISCLOSURES:
  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 investor 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 investor 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 investor 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 investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
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