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Investing success: How much luck and how much skill?

Jun 20, 2015

In this issue:
» Rahul Shah's 'Money Multiplier Formula'
» Graham's secret to not losing money...
» Smartphone market in India: High growth but highly competitive
» ...and more!


00:00
Some people think stock markets are a gamble. The movements in the markets appear extremely random and volatile. Even after making some bucks on the bourses, many people regard stock markets with a high level of apprehension and uncertainty. You never know how the stock prices will be the next day. What if stock prices tank and the gains are lost? Yes, many investors do live with these kinds of fears even after many years of being in the stock markets.

Anyone who would have invested around the latter part of 2013 or early 2014 would have been 'lucky' and made a fortune as stock prices went up multifold as the Modi-led BJP government came to power at the Centre. On the other hand, a person who would have invested in recent months may have been 'unlucky' and seen his portfolio value go down.

So what is it that explains some people's success and some people's failure? Is it luck? Is it destiny? Are some people just born to become rich? And some people destined to be losers? Does luck really play a part in the game of investing?

Luck does factor in if you choose a very limited time horizon. Like the one we mentioned above... But if luck was all there is to investing, then the fortune made in one bull rally would be wiped out in a market crash.

How is it then that some investors consistently manage to make handsome returns on their investments even despite all the uncertainty and volatility? Do you have any guesses?

The answer is RIGHT PROCESS. Right process is like a tested formula that delivers solid results across market cycles.

The good news is that if you are an investor looking for one such successful formula, you need not invent the wheel. There's one that has been already discovered, back tested and replicated across market cycles. To say the least, the results have been astounding!

And guess what, this successful formula comes from none other than the pioneer of value investing - Ben Graham, the investing guru of Warren Buffett.

Interestingly, this successful formula came around the last leg of Ben Graham's career and is not as widely known as his earlier works.

Rahul Shah, as you may know, is a voracious reader and an astute disciple of Ben Graham's style of investing. When he chanced upon what he likes to call the 'Money Multiplier Formula' he was simply amazed. He couldn't believe that such a simple investment formula could consistently deliver such unbelievable returns. Not someone to take things for granted, he back tested the formula in the Indian stock markets to see if it would work for Indian investors.

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 BSE-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 BSE-Sensex returns!

When these results were shared with the entire team, we were all convinced that it was an idea that would be of immense value to our subscribers. Our conviction got vindicated when some of the stocks that Rahul Shah recommended through this 'Money Multiplier Formula' delivered returns to the tune of 545.4%, 175.9%, 170.1% and 134.9% in less than a year's time!

Now, if you wish to know more about his portfolio and how he goes about implementing his formula, you will have to hear it from Rahul himself...

Do you think luck plays a part in investing success? What processes do you follow to ensure that you become 'lucky'? Let us know your comments or share your views in the Equitymaster Club.

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


02:20
Let's take our discussion about the right investing process forward. What if we told you there is a way to avoid losses while investing in stocks. Would you be interested in this process? Well you need to look no further than Benjamin Graham we believe. As we have stated above, the 'Money Multiplier Formula' holds the potential to beat the markets by a wide margin. What is less appreciated is the fact that Graham's principles help investors minimize losses and in many cases, avoid them altogether!

Now we cannot guarantee that investors won't lose money if they follow his principles. But we can say with confidence that losses can be reduced drastically. Those who have followed his approach can attest to this. A renowned value investor said the following: "Everyone I know that followed Ben had one thing in common, they never lost money. Because we were taught to buy so cheap, that no matter what happened, we were fine." This statement sums up the cornerstone of value investing - margin of safety. This is the concept that lies at the heart of the 'Money Multiplier Formula' too.

03:10
 Chart of the day
With India being the second largest mobile phone market globally, a bunch of players have entered the country to launch their products. And in the process it has become one crowded and tough market to operate in. Today's chart of the day indicates the market share of the top five players in the smartphone market over the past few quarters. It may be noted that barring the largest two players, names of the third, fourth and fifth players have been constantly changing in each quarter.

The top two spots are taken by Samsung and Micromax, which had a combined share of about 48% in the latest quarter. The next three positions are quite competitive with Karbonn, Intex, Lava, Nokia, Xiaomi, Motorola and Microsoft fighting it out each quarter.

Fluctuating Market Shares of Smartphone Players In India

The mobile phone business is about maintaining market share and constant product launch. As reported by The Economic Times, lead time for launching a product is believed to be as less as two months, after which companies are forced to cut prices as competition launches phones with similar features and lower prices. Not to mention the fact that this industry does need to deal a lot with inventory management and overstocking issues.

These are, in fact, just some attributes of a tough sector. While the mobile phone business may seem fancy and new age, the fact of the matter is that over a long period, players in such highly competitive businesses rarely do make for good investments. The constant change in products and technology makes it difficult for companies to maintain their edge. Blackberry is one textbook example. With such businesses it becomes difficult for one to maintain competitive advantages over longer periods. The key learning here would be that investors would be better off sticking to companies that aren't likely to get affected by competition anytime soon.

04:00
Barring a few markets including India and the US, all the other markets witnessed downfall in the week gone by. The Chinese index saw the steepest correction of 13.3% since 2008 on concerns of strict trading rules as well a string of IPO's hitting the market. The index had more than doubled last year and had been trading in the frothy zone particularly as Chinese economy has been tempering down despite monetary easing measures by the central bank. Among the other Asian markets, the Japanese, Hong Kong and Singapore markets were down by more than 1%. All the European markets also ended the week in the negative territory on fears of a full-blown banking crisis after talks of the euro zone finance ministers broke down.

The US markets were up by 1.2% in the past week even as the Fed assumed a dovish stance saying that it would wait for signs of improvements in the economy and easing of inflation before it raises interest rates.

The Indian stock markets showed a smart recovery after remaining in the doldrums in the past four weeks. The index posted a gain of 3.4% led by an above-average progress of monsoon until now. Even the US Fed's announcement to gradually raise interest rates helped lift sentiments in the market.

All the stocks, barring realty, were upbeat and have posted gains during the week. Oil & gas stocks were the biggest gainers. Even the prospects of good monsoon saw the auto and the consumer durable stocks posting gains of over 4% for the week.

Performance during the week ended June 19, 2015
Data source: Yahoo Finance

04:40
 Weekend investing mantra
"You can have an extraordinary difference in the price level mainly because not only speculators but because investors themselves are looking at the situation through rose colored glasses rather than dark blue glasses." - Benjamin Graham

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

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1 Responses to "Investing success: How much luck and how much skill?"

Ravi Viswanathan

Jun 20, 2015

What do you mean by "Good Luck", is there any meaning to this at all ?.

You will get good luck if you have practiced enough or tried & tested enough to become a professional in what you do.

This is what i call thought leadership. One needs to implement what he has learnt only then would he/she would be able to see his results in play.

Investing is about 90% hardwork & 10% luck, wherein luck is the "timing" :).

hardwork is 'What to buy", sectors, inexpensive valuated companies, good management ( as seen from consistent dividends, better quick ratios etc).

Why i say timing is very important ?, & why do many investors say "You cannot time the market" ?.

Timing is important because it installs discipline in you as a investor. Investing is not like buying vegetables, neither is an SIP going to give you higher returns than a lumpsum investment. Hence you would chance your luck by ensuring you invest when the markets are undervalued.

You have to be a sniper in a bull market & a carpet bomber in a bear market.

Thanks
Ravi

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