How Much Money Do Smart Investors Make in the Market? - The 5 Minute WrapUp by Equitymaster
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How Much Money Do Smart Investors Make in the Market?

Jun 7, 2017
In this issue:
» Earnings yet to catch up with valuations
» IT sector slowly but surely on the path to recovery
» Market roundup
» ...and more!
00:00
Taha Merchant, Research Analyst

We came across a very interesting compilation* the other day.

It pegs the excess returns above the S&P 500's returns to the returns of highly successful stock investors around the world. And it does so with reference to the time period over which these returns have been made.

On one extreme is macro investor Jim Rogers. He has the highest returns of the group, but over the shortest period of time. His annual excess returns above the S&P 500 have been a tad over 30%, but for only about eleven years.

On the other extreme is of course fundamental investor Warren Buffett. At about 13% above the index, is returns lie somewhere to the middle of the group. But he's done this for almost 55 years!

And then there's all sorts of other investors with interesting records. Like Joel Greenblatt with about 30% excess over twenty years. And George Soros at about 16% excess for about 35 years.

Looking at these numbers, a few things become instantly clear.

In a stock market full of 'one-hit-wonder' investors, remember that consistency is what separates investors who know what they're doing from those who have been merely lucky. And the longer the record of success, the better.

Even five years - which seems very long to the average investor - is not enough to prove your mettle in the market. That's because market cycles can easily last longer than that. And we've time and again seen investors make easy money in one leg of the market's cycle only to lose it (and then some) once the cycle turns.

Indeed, the true test of an investor's strategy is its success across various market cycles.

What about the best investors in India? What strategies are they following for success in the stock market? Getting answers to these questions is not easy.

But there is some good news for you on this front.

We have revealed a 'secret' way for you to track and follow India's Top Investing Gurus...And potentially, join them as they generate massive returns from stocks.

Yes, it is something that has been under wraps for over a year now...as we fine tune it - but now we have finally revealed it.

Keep an eye on our updates in this regard.

02:30 Chart of the day

The markets are touching record highs every day. It makes sense to sit back and evaluate if the fundamentals are in place for such heady growth. When one looks at corporate earnings over the past 5 years, it paints a different picture.

Earnings Yet to Catch Up with Valuations


While valuation has reached dizzy heights, earnings are yet to catch up. Investors are hoping that earnings will eventually catch up with valuations. Even the slowdown on the economy due to the notebandi impact has been ignored.

The GDP numbers reflected the recent slowdown in the economy. GDP grew at 6.1% for the fourth quarter of 2017, a fourth consecutive decline for the quarter.

The corporate results for the fourth quarter of financial year 2016-17 also highlighted the slowdown in the economy. The combined results of 2200 odd companies largely showed decent numbers, but still a sharp decline from the third quarter of 2016-17.

With money from retail investors coming into the market at a steady pace, the general assumption amongst investors is that growth will eventually come and justify the premium valuations they've given to the markets. Perhaps investors are getting ahead of themselves.

03:45

The BSE IT Index gained 2.6% yesterday. The gains were led by giants like Infosys, TCS and HCL Tech. It came as relief after the under-performance of the sector since the past one year.

Trump's recent protectionist measures related to jobs in the US had threatened to disrupt the IT industry. But as my colleague Tanushree mentions in her 5-Minute WrapUp, the investor reaction to IT stocks were more out of perception than actual reality.

Though there is no doubt that there will be a fundamental change in the way business is done in the IT industry, it turns out that most of the IT firms were gearing up for this change already.

IT firms have started to adopt measures like hiring more locals in the US, getting more work done from India or other offshore locations, cutting down on low-margin clients, and stepping up automation.

All these measures will surely have an impact on profitability margins in the near term. However in the long term, companies with niche product or service offerings will survive.

Large Indian IT companies, on an average generate more than 50% of their revenues from the US clients. Companies have also started focusing on other markets and gradually reducing their dependence on US.

So as long as you aren't worried about the revenue guidance in the coming quarters, you need to do just one thing: Stay focused on valuations.

04:48

At the time of writing, share markets in India were trading marginally higher ahead of monetary policy today. All the sectoral indices have opened the day in green with metal stocks and consumer durables stocks leading the gainers.

The BSE Sensex is trading higher by 62 points while the NSE Nifty is trading higher by 23 points. The BSE Mid Cap and BSE Small Cap index have opened the day up by 0.3%.

04:56 Investment Mantra of the Day

"Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market." - Warren Buffett

*Source: ValueWalk

This edition of The 5 Minute WrapUp is authored by Taha Merchant (Research Analyst).

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