Ignore this 'Amitabh Bachchan' stock filter at your own risk
(Apr 15, 2015)
|A A A
In this issue:
» Does it still make sense to invest in mid, smallcaps?
» BoFA: 6 in 10 chances that US markets won't fall in an declining earnings scenario
» Round up on markets
Recently, while doing some random search on a leisurely Sunday, a rather interesting looking list grabbed my attention. It was the list of some of the top Bollywood dialogues of all times. Guess which actor had the maximum entries in the list? Amitabh Bachchan of course. His is a visage and voice tailor made for delivering great dialogues don't you think. And over the years, producers and directors have milked these attributes of the Big B to the maximum in my view.
What is an article on dialogues and Bollywood doing in a space dedicated for sensible long term investing you would ask? Well, just as dialogues have come to be the heart and soul of a lot of Bollywood movies, a dialogue holds an important place in your investment process as well.
Don't trust us? Just ask Charlie Munger about this. Apparently, Buffett's right hand man is convinced that having a dialogue about investments with another like-minded investor brings in tremendous value. And mind you, his discussions around investments weren't always with Warren Buffett. It's just that he always had someone to talk to. As is usually the case with Munger, his reason behind doing so is as fully seeped in logic as ever.
You see, our brains are unique in the sense that each brain will tend to process the same information differently. Therefore, even though all of us may be exposed to the same data and information, it is absolutely normal to expect us to come to different conclusions in areas like investing. So why not exploit this quirk of nature in a constructive manner as per Munger. Therefore, to the extent that one can find someone who's thoughtful and not processing data similar to us, it can be tremendously useful to have dialogues or conversations around stocks.
I'm sure just as I do, you also know a lot of people who have certain deep rooted beliefs or habits that look weird to the rest. Like this one about a certain relative who always insists on sitting in the very same chair at the very same place every time India plays a cricket match. Why? Simply because the last five times he sat there, India won. No amount of explaining that India has also lost on other 10 occasions that he sat there has made him give up this routine.
What I just highlighted is another quirk of our brain. When forming certain beliefs, it only takes in that information that conforms the belief. Try presenting it with information of the opposite kind and it will promptly reject it.
Trust us, this can prove pretty dangerous while picking stocks. For once you start to form a positive view of a company; you'll reject or not give the necessary weightage required to any bad news or a genuine concern that could be damaging to the company's long term prospects.
This is another area where having a dialogue or a conversation with another investor who's perhaps not as enamored by the company as you can come in really handy. In fact, some successful investors we know of go to the extent of inviting for a presentation, an analyst or an expert whose views are in total contradiction to their own views. Indeed, doing this does not totally eliminate all errors associated with stock picking. But it does help arrive at as sound a judgement as can be possible.
So, in conclusion, having a dialogue around stocks helps immensely we believe. It not only aids in putting thoughts in an organised manner so that the other person can understand. But also helps in getting a perspective that could be a lot different from our own and therefore help identify holes in our theory.
Please note that we do not necessarily have to agree with the point of view of the person we are having our dialogue with. Also, we have to ensure that the other person has no vested interests and as Charlie Munger says, it's just two people having conversations about thoughts.
So, go ahead and engage in dialogues about stocks and make this filter, which we can in a lighter vein the 'Amitabh Bachchan' filter, an important part of your investment process if you haven't already.
Do you have dialogues with a like-minded investor every time you contemplate buying a stock? Let us know your comments or share your views in the Equitymaster Club.
--- Advertisement ---
This Could Meet Your High Expectations...
Investing in the right small caps could push your portfolio's returns to the high values you desire.
Now, we both know that small caps can be riskier than the safe blue chips but the potential returns could be extremely exciting too!
And at Equitymaster, we have been guiding smart investors, like you find the best small cap investment opportunities for more than 7 years now...
Of course small caps carry an inherent investment risk, but if you are willing to take that risk I think you could be well on the way to booking such profits too.
Click here to see how you too could see your returns match... and sometimes even outstrip, your high expectations.
At the peak of the 2008 bullrun, the S&P BSE Midcap and S&P BSE Smallcap indices touched their highs of about 10,110 and 13,975 points (closing prices) respectively. It was only after in November 2014 - or almost seven years - when the midcap index crossed that figure. It is currently hovering around levels of 11,070 points. The smallcap index on the other hand, is yet to breach its all time high figure. Currently it trades at about 11,900 points.
Nevertheless, small and midcaps have been on a tear over the past year. As today's Chart of the day indicates, the smallcap index is up by 59%, while the midcap index is up by about 52% from a year ago. The BSE-Sensex on the other hand is up by only 28% YoY. Given the sharp run up in the former two indices, their valuations have surged substantially as well.
More steam left in mid, smallcaps?
As reported by the Business Standard, midcaps on an average are trading at 40% higher valuations as compared to the benchmark indices; smallcaps trade at a premium of about a fourth.
So does it make sense to invest in smallcaps in general in such markets? We asked Richa Agarwal, our Managing Editor of smallcap stock recommendation service - The Hidden Treasure - to give her views on how to approach investing in smallcaps in such markets. This is what she had to say:
"It is evident that there is a solid bull rally in the smallcap space. I have no doubt that many smallcap companies are geared to grow at a solid clip in the coming years. The optimism in the valuations is a reflection of the expected turnaround in the Indian economy. But investors should not go overboard as smallcaps tend to be highly risky. There are these four things you should never forget while investing in smallcaps. 1) Look for companies with sustainable business models; 2) For companies with strong fundamentals, it may sometimes make sense to pay a slight premium. But as a thumb rule, don't overpay. 3) Invest for the long term. Don't be swayed by short term price swings. Smallcaps are a pretty volatile lot. 4) Asset allocation is the key. Don't overexpose yourself to a single smallcap stock."
We would like to emphasize on the last point. Asset allocation is key in such markets and we believe rebalancing one's portfolio would be key to ensure one does not have too much exposure to a particular stock. A quick gauge at the risk reward ratios should help in identifying the stocks that need trimming in case they have shot up in this bullrun.
Continuing with our discussion on valuations and earnings growth, we came across an interesting write recently. It seems that analysts over at Bank of America Merrill Lynch are not very concerned about the earnings growth downgrades that are happening at the moment in the US. They do not expect stocks to follow suit as long as the economy maintains its non-recessionary phase. How did they come to this conclusion? Well... the analysts seem to have done some back testing and learnt that in similar times - that of non-recessionary quarters in which earnings per share growth was negative - the S&P 500 moved higher by an average or 2% about 6 out of 10 times.
Sure, back testing does make sense. However, we do believe that such claims at a time when valuations are at their highest levels in nearly a century, and a bull run that is obviously driven by loose monetary policies, should be taken with a pinch of salt.
Meanwhile, Indian stock markets had a negative outing today with the Sensex closing lower by around 245 points. The NSE-Nifty ended more than 80 points lower. Healthcare and auto stocks were amongst the biggest losers. Amongst global indices, while Asian indices closed mixed, European indices have opened on a positive note.
"In the short run, the market is a voting machine but in the long run it is a weighing machine" - Benjamin Graham
|| Today's investing mantra
Today's Premium Edition|
Is shareholder activism gaining prominence in India?
Why management can no longer toy with minority shareholders these days....
| Get Access
|This edition of The 5 Minute WrapUp is authored by Devanshu Sampat and Rahul Shah.
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
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.
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.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
Details of Associates are available here.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
- 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.
- 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.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- 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.
- 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.
- 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.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Reco. Price: It is the price at (or below) which we have recommended to buy the stock.
- Stop Loss: If the stock reaches or goes below this level you will have to exit from the long position.
- Target Price: If the stock reaches or goes above this level you will have to exit from the long position.
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 infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (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, 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. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407