How to Lose 90% of Your Investment - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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How to Lose 90% of Your Investment 

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In this issue:
» Are FIIs really abandoning India?
» Mark Mobius wants Chinese govt to let stocks fall!
» Why the Yuan devaluation won't affect India too much
» ...and more!


00:00

How would you like to be left with Rs 10 for every Rs 100 you invest in the markets?

How many of you are rubbing your hands in glee at the thought of that?

My guess is none of you are, unless you misread the question. Apart from being a ridiculous offer, it challenges the whole point of investing.

Unfortunately, in the race to multiply returns, investors often ignore the most important part of investing: protecting capital.

Every bull market has its fair share of multi-losers, as we like to call them.

These are the stocks with very little fundamental support to back their astronomical valuations. Perhaps they got swept up in the overall enthusiasm for a sunrise sector. Either way, when the euphoria wears off, most of the stocks correct to a tenth of their all time high. At least. In the process, investors lose 80-90%. In other words, for every 100 you put in these stocks, all you can hope to get back is Rs 10.

Stocks like NMDC, Jaiprakash Associates, Punj Lloyd, Suzlon Energy, Jyoti Structures and Sterling Biotech and about 100 others have shed 80% of their market cap or more since their lifetime highs (in 2008, 2010 or 2014).

But this is not the motley list of stocks that have the ability to shave off investor capital.

The real estate sector, since the 2007 highs, has made the promoters of top realty companies 90% poorer. Smaller investors have some consolation in the knowledge that the markets haven't spared the big boys. Their business insights, familiarity with cycles, etc couldn't save them.

Realty stocks: Pound to pennies
Promoter Company Decline in networth, %
K P Singh DLF -90.5
Ramesh Chandra Unitech -99.1
Rakesh Wadhawan HDIL -93.2
Pradeep Jain Parsvanath -91.4
Hemant Shah Hubtown -91.1
Data source: Ace Equity, Business Standard

Tons of data and complex calculations alone cannot tell you which stocks are the safest bets. In fact it is rather difficult to predict the multi losers over the longer term than the multi baggers.

Get used to a lot of reading to know which companies are more likely to destroy your wealth rather than creating it.

As Charlie Munger once said

    The wise investor should read extensively, analyze like a fox (as opposed to a hedgehog), and act decisively and in scale when the right opportunity presents itself.

Avoiding the multi-losers is as valuable as predicting the multi-baggers.

What do you think? While hunting multi-baggers, how do you keep the multi-losers out of your portfolio? Let us know your comments or share your views in the Equitymaster Club.

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, please click here...

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

03:00  Chart of the day
Foreign Institutional Investors selling is one of the major reasons for the fall in many frontline stocks. This applies to not only the stocks mentioned above. It would be plausible to say that FIIs have reduced their holdings in some good quality stocks as well. This may be fine for them as they are sitting on good profits and are concerned about the rupee depreciation. However, it doesn't make sense for Indian investors to sell their good holdings. Such FII led sell offs offer a good chance for investors to go hunting for bargains.

Today's chart shows just how intense the selling pressure has been recently. Since August 10, when the Chinese authorities announced their shocking decision to depreciate the Yuan, India has seen the third highest amount of outflows to the tune of about US$ 3.3 bn (behind only Japan and South Korea)! However, we urge you to keep things in perspective. In 2014 Indian markets received US$ 13.4 bn of net inflows. Even in 2015, net FII investment up to August 10 was US$ 7.4 bn. Thus, there's nothing unusual about the recent outflows. Long term value investors would do well to keep this in mind.

Will FIIs continue to sell Indian stocks?

03:30
The recent global market turmoil was of course initially triggered by the stock market sell-off in China. But what rattled global investors even more than the correction itself was the reaction of the Chinese authorities. The draconian measures announced by the government to prevent the correction as well as the massive amounts of money pumped in to buy shares took everyone by surprise. However, it did not work. The Chinese markets still lost 2.2% last week. Their actions have only damaged their credibility. Now eminent investors and economists are calling for the government to step aside so that the markets can fall and find a level at which prices can stabilize. Leading global value investor Mark Mobius recently stated that he expected the Chinese government to reduce their intervention as they have realised that it's not working. If this were to happen, we can expect further a decline in Chinese stocks and more volatility in Indian markets as well.

04:05
"Its good for us" said the management of a company we met recently. The company faces stiff competition from China for its exports to the US. And the recent Yuan devaluations appeared to be an opportunity in disguise to the management.

It is not just companies but policy makers too that are worrying about opportunities and challenges from the movement in Chinese currency. But they could very well be disappointed. This is because of two reasons. First, India and China have little export product overlap and second the Yuan devaluation is too small to make a significant difference.

Even investors who are hoping that all the FII money exiting China will head straight for India may be wrong. It is unlikely that investors exiting China will invest in India irrespective of valuations and earnings growth here.

Thus for a long term investor there isn't anything very meaningful to read into the Yuan devaluation or the Chinese market crash. As we said earlier, you would be better off keeping away the noise.

04:45
In the meanwhile, the Indian markets were trading above the dotted line with the BSE-Sensex trading higher by about 163 points or 0.6% at the time of writing. Sectoral indices were trading mixed with those from the banking stocks leading the gainers and pharma stocks leading the losers. Markets in Asia put up a mixed performance today; while European indices were trading higher at the time of writing.

04:52  Today's investing mantra
"In the short run, the market is a voting machine but in the long run it is a weighing machine." - Benjamin Graham
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This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

Equitymaster requests your view! Post a comment on "How to Lose 90% of Your Investment". Click here!

5 Responses to "How to Lose 90% of Your Investment"

Jagdish Rai

Sep 13, 2015

There is no question or any doubt that stock markets all over the world are rigged. That is why retail investors with hardly any insight of the market fall into the traps laid by big sharks of the stock market, time and again, and end up losing their hard earned money big time. Most of us have burnt our fingers some perhaps many time over and quite a few faint hearted have said good bye to the stock market because of the losses. But we are ourselves to be blamed for this. And that is the reason we are members of EM, hoping to educate ourselves about the stock market.

Like 

Jagdish Rai

Sep 13, 2015

There is no question or any doubt that stock markets all over the world are rigged. That is why retail investors with hardly any insight of the market fall into the traps laid by big sharks of the stock market, time and again, and end up losing their hard earned money big time. Most of us have burnt our fingers some perhaps many time over and quite a few faint hearted have said good bye to the stock market because of the losses. But we are ourselves to be blamed for this. And that is the reason we are members of EM, hoping to educate ourselves about the stock market.

Like 

SANKARAN VENKATARAMAN

Sep 8, 2015

In your example quoted reg. stocks shedding 80-90%, NMDC is not correct. I have not found anything fundamentally wrong with it. good profit,Good ROCE, OK management. Due to cyclicality of its business, it is down along with other metal stocks.

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ARUN KUMAR ABROL

Sep 8, 2015

STOCK MARKET IS A PLACE CONTROLLED BY BIG BROKERS WITH THE HELP OF GOVT.AND CORRUPT BUREAUCRATS FOR SIPHONEYING THE HARD EARNED MONEY OF GENERAL PUBLIC BY ALLURING THEM WITH THE HELP OF PAID MEDIA TO MAKE A QUICK BUCK. EVEN SEBI HAVE NO CONTROL OVER THEM. RAMPANT INSIDE TRADING,MANIPULATION OF SHARE PRICES,DISAPPEARANCE OF MANY COMPANIES AT REGULAR INTERVAL WITHOUT ANY ACTION.CLOSED COMPANIES ARE TRADED AT HIGH PRICES.GOOD COMPANMIES ARE LAGGERS. UNLESS PRICES ARE DECIDED ON EPS AND GOOD QUALITIES OF MANAGEMENT STOCK MARKET IS A FARCE AND PURE SPECULATION.

Like (4)

Anand

Sep 8, 2015

Till recently NMDC was included in NIFTY & NV20 indexes. Still it is included in Quality30 as well as dividend opportunities indexes of NSE.
Request equitymaster to be careful while bracketing stocks like NMDC with other fundamentally weak stocks. If a person invests in NMDC at current levels he can expect dividends similar to bank FDs(due to high dividend yield) and ensuing capital appreciation will be real bonus.
Majority of subscribers including me are not financially savvy and that is the main reason we place faith on equitymaster to whom I will give a perfect 10/10 even at midnight for the moat called 'TRUST' unlike innumerable similar entities in market, misguiding investors with vested interests.
Request to be careful in future when bracketing companies applying due diligence to seperated grains from chauff so that interests of retail investors who consider EM articles as gospel of truth is protected.
Thanks & regards
Anand
0091 9496259185

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