Sau Sawar Delhi Chale, Toh Aap Bhi Chal Diye? - The 5 Minute WrapUp by Equitymaster
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Sau Sawar Delhi Chale, Toh Aap Bhi Chal Diye?

Jul 12, 2016
In this issue:
» Are Midcaps Driving the Markets?
» What Do Indians Think About Real Estate?
» ...and more!
00:00
Rohan Pinto, Research analyst

I just finished a biography of QRG. For the uninitiated, that's Qimat Rai Gupta, founder of Havells India. That company, which he built from scratch, is presently valued at more than Rs 20,000 crores.

You can learn a lot from biographies. Especially when the stories are of the blood, sweat, and toil the promoter went through to establish his company.

For example, when Havells thought of getting into the fans business, the only strategy was to manufacture and sell fans cheaper. Going for high-priced, high-quality fans was unheard off.

QRG ran down the herd mentality instinct with discernible derision. And through sheer gumption, he sold his fans as a premium product. And it worked. People paid up...

All along his journey, QRG never shied from the untested path. He was willing to be criticised...to be treated as an outcast. More importantly, he understood if he wanted to be a contrarian, he had to be right.

That is exactly how we operate. We strive to avoid undue influence from the crowd. We know that positioning yourself deep within the herd might look like a safe strategy, but then you never get to graze on the fresh grasses.

Let's go back in time - circa 2007-08. Stocks of engineering and infrastructure companies were a rage. These businesses were operating on single digit margins, had high competition. Jaiprakash Associates was even termed as the next L&T. Herd mentality was widespread, and the crowd bid these companies to irrational heights without much thought.

What happened next?

Project implementation delays...cost overruns...cash flow mismatch...more debt...more interest payments... The firm eventually reported losses and shareholder wealth was wiped off the face of the earth.

Blindly following the crowd is a serious risk to returns. Not just return on capital but the return of the capital.

So, how does one protect himself from getting influenced by the Herd?

Discipline, independent thinking, questioning every decision, keeping a long-term horizon, not falling for fancy stories of flashy stocks, reading a lot of primary research... The list continues, but it is not very difficult. Just focus on improving yourself every day, one day at a time.

One of our Hidden Treasure recommendations is from a space that was overbought during the boom period of 2006-08 and has since destroyed shareholder wealth.

But in our research, we found the management prudent in their capital allocation approach. They understand that they are trustees. It was our ability not to paint everything with the same brush that led us to give a call on this company. And now with our current target price, there is still a lot of upside left.

We look for managements who respect capital. Who aren't looking to lose it all on a single bet. Who understand that it is sometimes okay to lose if it means living to fight another day.

This is not to say it always works; we have lost battles too. However, that has not made us lose sight of our objective: finding companies that give risk adjusted returns. We continue to look for these companies and are willing to go against the herd to find them for our subscribers.

What are your strategies to fight herd mentality? Let us know your comments or share your views in the Equitymaster Club.

02:35 Chart of the Day

Market participants would have noticed the huge outperformance of non-index stocks over the last year or so. It's impossible to miss. The Sensex and Nifty have gone nowhere for the last year or so. But stocks of mid and small caps are flying.

As today's chart shows, this outperformance started around March 2015. When the Sensex failed to decisively break past the 30,000. Since then the benchmarks have languished. But the action has clearly shifted in favour of midcap stocks.

Will Midcaps Continue to Outperform?

Now this can be seen as something that is perfectly normal. But it does cause us a bit of worry. Usually, when mid and smallcaps outperform it's a clear sign of retail-investors entering the markets in large numbers. They tend to speculate and trade in and out of stocks where the fundamentals are questionable. Of course we don't want to generalise but if the past is anything to go by, then this should be a time for caution... and not a time for aggression.

03:50

The results of a new Pan-India real estate survey conducted by Track2Realty is doing the rounds. It makes some startling claims. Apparently, Indians aren't thinking clearly when it comes to property. An overwhelming number (84%) of people surveyed were not satisfied with the home they bought. The reasons are the obvious well-documented issues with real estate developers. Yet, 88% of the people still believe that real estate is the best asset class! Only 7% said that stocks and mutual funds were their top choice.

There is so much that is wrong with this attitude that we don't even know where to begin. Rahul Shah recently wrote an eloquent article explaining why equities are the better asset. Read on to find out why stocks can crush real estate over the next 3-5 years. We are very clear where we stand on this issue. Do let us know what you think.

04:40

After opening the day in the green, the Indian stock markets moved upwards and were trading well above the dotted line at the time of writing. The BSE-Sensex was trading higher by about 102 points (up 0.4%), while the NSE Nifty is trading up by 32 points (up 0.4%). Most sectoral indices were trading on a positive note with stocks from the metal and banking sectors leading the gainers.

04:50 Today's Investing Mantra

"The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst).

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2 Responses to "Sau Sawar Delhi Chale, Toh Aap Bhi Chal Diye?"

Krishna Kumar

Jul 13, 2016

Is there any conclusive evidence to confirm if India's most profitable companies have become public ? There is a feeling that only companies doing average performance are quoted in stock market while the really profitable ones dont enter the market. The number of entities created by large congalamorates dont reveal any insight in to how money moves in and out of various entities and hence not able to figure out the financial status. Asking investors to invest in company with good management is not a good suggestion. There is no publicly available information about directors or top management of any company. So ordinary investors can not find who is good. Many analysts coming in TV seem to be recommending companies where they have vested interests. In all confusing landscape when it comes to equity investing.

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SJ

Jul 12, 2016

Yes, and I clearly remember one of your subscribers asking for clarifications on one of your other recommendations wherein Richa Agrawal recommended a stock whose management was not into prudent capital allocation. Infact, the "enlightenment" you are giving right now had come from a subscriber who did not approve of your recommendation.

So now you learn to game the system but not accept you were wrong.

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