The only way you can be ahead of 99.9% of fellow investors
(Jul 17, 2015)
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In this issue:
» Will 'Make in India' remain a pipe dream?
» How vulnerable is India Inc to exports?
» Update on the markets
» ...and more!
What according to you is the only thing that could differentiate you from every other investor? In a digital world it cannot be access to information. Technical knowledge can be attained over time. Investing acumen can be developed with experience. So these are certainly not the factors that will offer you an edge over the rest. The only thing that every investor does differently is manage his portfolio. And it is with this that you could ace over 99.9% of fellow investors.
You would recall my colleague Rahul Shah writing about the concept of 'Lohe Ki Almari' portfolio in an earlier issue of The 5 Minute Wrapup. The concept was nothing but an adapted version of Robert Kirby's 'Coffee Can Portfolio'. Writing in The Journal of Portfolio Management back in 1984, Kirby had opined that the Coffee Can Portfolio is one of the best learnings from the Old West. That was the time when people put their valuable possessions in a coffee can and kept it under the mattress.
The uniqueness of Kirby's 'Coffee Can Portfolio' was that it clearly showed how the portfolio is designed to protect you from yourself. More specifically, the obsession with checking stock prices, the frenetic buying and selling, the hand-wringing over the economy and bad news. It forces you to extend your time horizon. You don't put anything in your Coffee Can Portfolio that you don't think is a good 10-year bet.
And what was Kirby's inspiration? It was an article by Benjamin Graham written in the earliest years of 19 century. Graham was of the opinion that the development of liquid, high-volume auction markets for shares of publicly held American companies has been about the worst thing that has ever happened to the investment business! The logic of the statement is so simple yet so profound. When you know you can sell something almost instantaneously, it messes with how you think about the purchase in the first place. You can be careless because you can get out quickly. And you keep looking at stock prices to know how soon you can make the earliest exit!
So you see the key principles of building a safe yet very profitable portfolio over decades has not changed in over a century! Yet, as investors each one of us tries to innovate with our long term portfolios. And each time we end up doing something foolish.
Ironically when it comes to other illiquid asset classes like real estate our thought process is very different. Like Kirby wrote "I have said often to almost anyone who would listen that... a portfolio of securities [should] be run like a real estate portfolio... The typical real estate commitment is made in anticipation of a projected cash flow versus expenses, i.e., the future internal rate of return... the investor does not assume that he will be able to sell the property at a higher price to someone else within a short time. Common stock portfolios should be constructed, and their future returns measured, by the same set of criteria."
We see no reason why sticking to these words of wisdom while building your safe stocks portfolio will not help you fetch returns better than most of your investing peers.
Do you like the idea of treating your stock portfolio like a real estate investment? Let us know your comments or share your views in the Equitymaster Club.
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Speaking of long term investments, the 7 signs of the Megatrend are some of the key factors that we are looking at. One of them being the progress of Make in India.
The announcement of the US$ 12 billion steel plant by global giant Posco a decade back was nothing but a dream come true for India. This was well before anyone conceptualized or spoke of Make In India. The investment was seen as a sign of trust in India's scope for nurturing the manufacturing sector. Also the mega capacity steel plant was expected to feed into India's blockbuster infrastructure growth story. Above all, the biggest foreign direct investment (FDI) at that time, in Odisha, was expected to change the fortunes of the state.
However, after batting every possible hurdle over the past 10 years, Posco has decided to give up! After series of protests from local tribal groups, land acquisition and environmental obstacles, the new Mining Law was the proverbial last straw to break the camel's back. Instead of manufacturing steel in the country, the company will be importing the metal from South Korea for its processing centres in India.
Instances like these make us wonder how serious are the state governments in helping the centre fructify the Make in India plan. Without some quick reforms to iron out the land acquisition and environmental issues even at the state level, the 'Make in India' revolution will remain a distant dream!
Here's an interesting stat that the business daily Mint has shared today. 36% of the Nifty companies earn more than a third of their revenues from abroad. But when it comes to market capitalisation, these companies contribute to more than half. While the IT and pharma heavyweights have a much larger exposure to foreign markets, other key sector players having major exposure abroad include auto, metals and capital goods.
Today's chart of the day shows the top 15 companies with global exposure.
Which firms are highly reliant on the global economy?
Data Source: Bloomberg, CapitalLine; *Bank of Baroda
As reported, with global markets showing no signs of recovery anytime soon, revenues of companies having global exposure seems to be under threat. And that India is unlikely to achieve its targeted GDP levels if the 'export' engine doesn't start to chug along.
It may be noted that around the millennium, exports formed about 10% of GDP. As of FY14, the figure stood at 17%. The key sectors that are seeing trouble are commodities and the capital goods spaces - given the overcapacity situation in case of the former and the slump in crude prices in case of the latter.
But when it comes to the outlook on markets, is it possible that these sectors will remain a drag on the overall index? Well, it is very difficult to comment.
However, considering that a lot of the pain is already priced in, and with certain commodity businesses trading way below their book values, we believe the downside risks are not as bad as they are made out to be. For instance, heavy weights in the metal sector - Tata Steel and Hindalco are currently trading at about 0.87 x and 0.54x their consolidated book values. As a percentage of the total market cap of the Nifty, their weightage is less than 0.5% each. So, what will essentially determine the movement of the index will be the top half, which contribute to about 80'% of the index's market cap. The trends in their earnings, growth and valuations will essentially be the aspects that will drive the index movement in the future.
Indian markets were hovering around the dotted line at the time of writing. The Sensex was trading higher by about 20 points. While some weakness was seen in stocks from the realty and banking spaces, stocks from the capital goods and power spaces were the key gainers. Both the midcap and smallcap indices also were trading firm today, with the S&P BSE Midcap and S&P BSE Smallcap indices up by about 0.3% and 0.6% respectively.
"It's in the nature of stock markets to go way down from time to time. There's no system to avoid bad markets. You can't do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go." - Charlie Munger
|| Today's investing mantra
Editor's note: There will be no issue of The 5 Minute Wrapup on 18th July on account of Ramzan Id.
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|This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Devanshu Sampat (Research Analyst).
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