Why I believe in this Money Multiplier Formula and so should you... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why I believe in this Money Multiplier Formula and so should you... 

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In this issue:
» How low were infra investments in 2014
» Are RBI and SEBI the best regulators?
» Roundup on the markets
» ...and more!


00:00
Having worked with him for over 9 years, I take Rahul Shah very seriously when he talks about stock screeners. All these years, I have hardly come across any other analyst who is equally adept at looking at the finer nuances of a company's fundamentals as he is at screening stocks with a broader perspective. So whenever Rahul has brought to my attention any particular changes that we should make to our product specific screeners, it has almost always been a revelation for me!

But this time it was different. It was early 2014 and market sentiments were close to all time lows. The attractiveness in valuations had given us plenty of opportunities to recommend stocks to buy across services. And the team was pretty happy knowing that the stocks we had recommended late 2013 onwards at very comfortable valuations were bound to bring in excellent returns!

But Rahul's mind was onto something else. And when I probed further, he told me that he had been back testing the results of a screen that could offer unbelievable returns. And not just that, the screen does not require one to be a mathematical genius. Instead, all one has to do is follow 3 simple rules:
  • That the stocks should be selected keeping an investment criteria in mind and not for speculating

  • There should be a definite selling policy

  • And the allocation to the stocks in one's portfolio should be such that at all times at least 25% is allocated to stocks or bonds.
Now this seemed rather simplistic to me so I asked him for some proof. And what he showed me was something I could have never imagined. For the first sample of stocks that he took for back testing he analyzed the performance of what he called 'The Money Multiplier Portfolio' versus the Sensex, between 2003 and 2009. Then he tested the same set for the period ranging from 2006 to 2012. He repeated the tests for different valuation criteria. And believe it or not, each and every time, the returns of the Money Multiplier Portfolio were between 3 to 5 times the Sensex returns!

So this convinced both of us that this was a formula that our subscribers could use very productively to make some handsome returns. But then Rahul was not willing to spill out all the beans there and then as he wanted to make sure that his formula actually works!

And did it work?

Well, I do not have the liberty to name the stocks. But a few of them have offered returns to the tune of 545.4%, 175.9%, 170.1% and 134.9% in less than a year's time!

So after a lot of convincing, Rahul has finally agreed to share some of his insights on the screener!

And he will give a glimpse of his process to a select group in an upcoming Master Series. This session could bring to light some new hidden concepts and secret formulae which could guide you towards picking out your next stock investment.

So unless you wish to miss out on what could be, our biggest, most informative, and actionable Master Series, here is what you need to do.

Cancel any other appointments you might have... and confirm your participation, free of cost, before the seats run out.

I am confident that this is going to be our most awaited and most attended training session.

Now in normal circumstances at this stage I would have asked you to click a link to book a seat. But this time it's different.

After all, an opportunity where we reveal the formula behind some of our best picks is rare.

And that's why I have gone ahead and automatically opted you in for this Training Session with Rahul Shah.

So, there is nothing for you to do now. Just wait for further details in the days ahead.

(Just in case you want to be ABSOLUTELY sure that you don't miss this Training Session, I recommend you simply reconfirm your subscription to The 5 Minute WrapUp here.

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------------------------------

02:30  Chart of the day
Investment in infrastructure is a key to ensure that any country's long term growth rate remains buoyant. While it is the government's duty to provide the necessary infrastructure for growth participation from private sector is equally important. However, when it comes to tracking private participation in infrastructure investments India lags its peers by a huge margin.

As seen in today's chart, India ranks last in the list with private investments of just US$ 6.2 bn in 2014. Also, apart from Turkey; India is the only country whose investments in infrastructure fell in 2014 as compared to the previous year. Lack of private sector participation in infrastructure investments is a big drawback for India. First it creates a hindrance for growth. Secondly, it also reflects that private sector still lacks confidence and is unwilling to invest despite a change of government at centre.

Though the Modi government came to power only in May 2014 there were still 7 months for investments to show an uptick. The fact that they haven't, indicates that corporates are still circumspect about bureaucracy. With a new government in place this was not expected to happen. But one may argue that 7 months is a short time frame for investments to pick up meaningfully. Thus, it would be interesting to see how investments shape up over the next 2-3 years.

India's abysmal Infrastructure investments


03:40
We constantly read articles on how India scores low on a variety of parameters. Ease of doing business is one. Level of human development and transparency are some of the others. But there is one area where India rates very highly. And something we can be really proud of in the current global environment. And that is with respect to the financial market regulatory framework. Indeed, as per an article in the Economic Times, most global bodies of banking and capital markets have given the to-most ratings to both the SEBI and the RBI. Indeed, both of them have been rated better than their peers in China and the US.

We are not surprised by this. The seeds of the global financial crisis were sowed in the US fuelled by loose monetary policies of the US Fed. The irony is that even after the crisis, the Fed chose to solve the problem by doing more of the same. Today, the Fed and its peers in Europe and Japan, can be held responsible for the distortion in the way global financial markets function.

In contrast, the Indian regulators have been very prudent. The RBI's strict regulations meant that the Indian banking system was mostly insulated from the global shocks that banks in the US and Europe faced. Also, the RBI has been quite independent in framing its own monetary policies and has not bowed down to constant pressure from the government and the corporate world with respect to interest rates. The same can be said of the SEBI which has been quite proactive in the last few years in ensuring that the interests of minority shareholders in companies are protected.

04:40
After opening on a buoyant note, the Indian stock markets shed most of the gains by mid-session. At the time of writing, the BSE Sensex was trading higher by about 54 points. The sectoral indices are trading a mixed bag with banking stocks finding some favour. The midcap index is up 0.3%. While the Asian equity markets closed a mixed bag, the European markets have opened in the red.

04:50  Today's investing mantra
"We don't have to be smarter than the rest. We have to be more disciplined than the rest." - Warren Buffett
Today's Premium Edition
A discussion on the financial performance of Indian ratings agencies
Are their stocks' high valuations justified?
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This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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4 Responses to "Why I believe in this Money Multiplier Formula and so should you..."

Rajagopalan Ramesh

Jun 13, 2015

The way the fundamentals of a scrip are studied and analysed by the EQM Team make me believe that the Money Multiplier Formula (MMF) would also work well. The ERM framework covers the entire gamut of a stock's potential and the basis of Price fixation giving room for a Margin Of Safety (MoS) is quite reliable. But I find it difficult to buy any such recommended stock at a price with MoS so built in. I am confident that MMF would also fare well. At the end of the presentation, I expect that this MMF would come to us at a price. As it is, I have been a subscriber to Stock Select, Midcap Select, Hidden Treasure, Value Pro, India Letter and 5 minute wrap up premium. With these, the MMF would also be another service which may call for subscription. I would like to stick to one particular product and profit from it to the maximum extent. The wealth alliance tends to be costly. It looks such products are more suitable for High Networth Individuals or Corporate Bodies - as they can only afford to have access to the services. Whatever it is, I trust EQM Team for their integrity and intelligence. I wish this MMF would also be a grand success for the EQM.

Like 

Al

Jun 12, 2015

You may also believe in Santa Claus. But please don't expect us to do the same. Show us the proof. Just cherry picking a few stocks with large returns does prove that the entire portfolio made 3 to 5 times the Sensex returns. And is it 3 or 5 times? Please be clear and specific. Don't try to mislead us with your marketing mumbo jumbo.

Like (1)

Alphones

Jun 12, 2015

You believe the Indian regulators have been very prudent. The RBI's strict regulations meant that the Indian banking system was mostly insulated from the global shocks. Ï fully disagree to this. What can the RBI do when the bad loans increase?
You say, the SEBI is too strict in protecting minority stake holders. This statement is also wrong. What SEBI is doing in case of any wrong doing by the promoters. Fines are being imposed and the company is de listed from the market. Do you call this protection to minority share holders?

Like (1)

Rajagopalan Ramesh

Jun 12, 2015

As regards financial performance of Indian Rating Agencies, I studied the Report with a great deal of interest. Different Dimensional Analysis reveal different end results. Understandably, analysts are keen when it comes to probing the necessary parameters. As per your analysis, in my view, CARE should command a good market price than CRISIL and ICRA for the simple reason that CARE scores over the other two - in terms of Operating Margins and Cash Flow generation. But why should analysts find a supporting rationale for high PEs? Why should market pay 53x and 64x, when fundamentals do not warrant the same. I suppose, Market does not act as an analyst and maybe they pay a price towards their speculative expectations. For rating agencies, if they employ larger cash flows in risk-free Investments, they tend to derive that much higher income as well - as similar to Insurance Companies.
Thanks for the nice article. I will closely observe the performance of CARE from Investment Perspective.

Like (1)
  
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