How to miss the multi-bagger bus and still do well
(Apr 18, 2015)
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In this issue:
» Investing is not all about finding the next multibagger
» India's best capital allocators
» Weekly market round up
» ...and more!
Here's a statistic that will fill your heart with pride. Did you know that a study done few years back had put the Indian origin Patels as owners of around 21,000 hotels and motels in the US? That's a staggering 42% of the US hospitality market and a combined worth of US$ 40 bn!
However, it wasn't always like this. The so called 'Patelisation' of the US hospitality industry traces its roots to the 1970s when Patels in large numbers landed on US shores from Uganda, where a certain dictator stripped them of their enterprises and drove them out.
When they finally landed in the US, their woes were far from over though. The US economy was undergoing its own bleak period on account of the oil crisis. The motels industry was one of its most damaged. But this is what the Patels set their sights on. Their game plan was simple. Get the banks to finance a chunk of the purchase price of motels and then move into them with their extended families. Doing this served two very important purposes. It not only eliminated the accommodation costs but the entire family could also double up as the motel staff.
The end result was a potent mix of low cost operations and an asset base that was in place with almost negligible capital cost. Needless to say the competition found it hard to put up a sustained fight. And one by one, a lot of the motels came to be owned by the Patels, making them a dominant force in the industry.
Perhaps oblivious to them, the Patels were using a time tested investment strategy. One where the focus is not on making huge gains but on trying to minimise the losses as much as possible. It was a classic case of what ace investor Mohnish Pabrai calls, 'Heads I win, Tails I don't lose much' approach to investing.
By starting the enterprise with very little of their own capital, the Patels ensured that downside was as good as non-existent. Please note that they did not worry about the upside too much as in how much revenues they can make. Their only aim was to not lose much should things don't work out in their favour.
If you thought the Patels were the only ones adept at this, let us tell you that as per Pabrai, even business leaders ranging from Richard Branson to L N Mittal have minted their billions using this very same approach. The approach of trying to minimise the downside so that the upside can take care of itself.
Does this ring a bell? It does, isn't it? After all, this is the mantra that Warren Buffett also seems to live by. Remember his famous two rule quote for investing? Rule number 1, don't lose money and rule number 2, always remember rule number 1.
In fact, a recent quote from a famous investor called Joel Greenblatt is pretty much along similar lines. In an interview, he offered the view that his largest positions are not the ones that he thinks he is going to make the most money from. Instead, his largest positions are the ones where he thinks he is not going to lose money in.
Now this is something that certainly doesn't strike as natural to majority of investors out there. They are of the view that successful investing is all about finding stocks that literally hit it out of the park. In other words, successful investing is all about finding the next big multi bagger.
However, as Greenblatt and the Patels and the Bransons we just highlighted show, the idea is to bet in such a way that even if one is wrong, one does not lose too much. Of course there's nothing wrong in trying to plunge headlong into trying to find that next multi bagger.
However, if you are looking for market beating results from your investing with a lot less stress and risk taking, then your portfolio needs to consist mostly of stocks where even if you are wrong, you don't lose a great deal.
Trust us, if history is any indication, there's very little chance you will walk away disappointed with this approach over the long term.
What do you think? Do you think when building market beating portfolio, it is ok if you don't focus on finding multibaggers and instead try to minimise permanent capital losses? Let us know your comments or share your views in the Equitymaster Club.
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Among the many ways to gauge quality of earnings of companies is a ratio known as the 'Return on Capital Employed' or ROCE. This ratio helps in assessing the returns that a company realizes from the capital employed by it. In other words, it represents the efficiency with which capital is being utilized to generate revenue.
ROCE is calculated by dividing the earnings before interest and tax (EBIT) by the capital employed.
However, while RoCE is a key gauging parameter, consistency of the same is as important. By consistency we mean sticking closest to the average levels over the period under consideration.
Today's chart of the day shows the list of top 15 companies (out of the BSE-500 index) that have ranked the highest on both the parameters combined. What we did was rank companies based on highest average RoCE over a five year period and consistency of the same separately. We then, added up both the ranks to get a combined score which we then sorted in ascending order i.e. lowest to highest. As such, the lower the combined score the higher the ranking.
While Coal India ranked number in this list, companies with the highest return ratios, namely Castrol and Colgate, lost out due to the relatively higher level of inconsistency.
It goes without saying that investors should not base their investment decision solely on this parameter, but should be considered in junction with other key parameters as well - including valuations.
Are these India's most consistent & best capital allocators?
* Calculated as Standard Deviation / Average of the period under consideration
Meanwhile, global stock markets witnessed a selloff in the week gone by on rising concerns over Greece debt negotiations. The Eurozone finance ministers are due to meet on 24th April in order to discuss economic and political reforms to be made by Greece in return for aid. However, there was some skepticism over whether the meeting will yield results. The German index bore the biggest brunt and was down by 5.5% whereas the French index declined by 1.9%. In UK, the jobless rate hit the lowest level since July 2008 and its stock index was down by 1.3%. The US markets were down by 1.3% for the week. Crude oil prices rallied to 2015 peak, at above $60 a barrel, on account of conflict in Yemen and the prospect of cutback in US shale output.
Asian indices witnessed a mixed performance during the week. The Chinese index spurted to its highest level since March 2008 on expectations of further stimulus measures from the People's Bank of China. China's gross domestic product for the first three months of 2015 fell to a multi-year low prompting stimulus measures. Even Singapore and Hong Kong indices were up by around 1.5% each. However markets in Japan and India ended in red for the week.
The Indian markets were down by 1.5% during the week on growing concerns over fourth quarter earnings. Largest IT services exporter, TCS reported a lower than expected March 2015 quarterly results. Realty, pharma and IT were the biggest losers for the week. Only oil and gas, metal and FMCG managed to post gains during the week.
Performance during the week ended April 17, 2015
Data Source: cnnfn, Equitymaster, kitco
"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." - Warren Buffett
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|This edition of The 5 Minute WrapUp is authored by Rahul Shah.
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