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Why This Stock Picking-Strategy is Doomed to Fail...

Sep 10, 2016

In this issue:
» Mimicking someone's portfolio will not take you anywhere
» Big ticket IPOs in the offing
» Monsoons in 2016 might end below normal
» ...and more!
00:00
Richa Agarwal, Research analyst

The stock of Aptech has been in the news for past couple of weeks.

The well-known education training provider is now foraying into the preschool business. As per the management, the preschool market in India, valued at Rs 160 billion and growing at 23% CAGR, is the fastest growing segment in the education space.

But that's not why I'm talking about this company.

What I find interesting is the 180% rise in the company's stock price in the last three months.

The reason cannot be the financial performance. The company reported a loss at the bottom line level in the quarter ended June 2016. The returns in last two years have been in the single digits, underscoring the unimpressive financials of the company.

And the way listed preschool companies (e.g Zee Learn and Tree House Education and Accessories) have fared does not offer any reason for such excitement.

What's Driving Aptech Stock Price Rally?

The question should rather be - Who's driving this rally?

In August, Rakesh Jhunjhunwala and his family raised their stake in the company. The stock since then has been hitting circuit limits.

Retail investors have flocked to Aptech not for the business behind it, but because they want to fashion their portfolios after that of the 'Big Bull' of the Indian stock market. With little confidence in their own stock-selection skills and a belief that the Guru could never go wrong, they have put blind faith in the poster boy of the Indian bull run.

And they've once again proved that man never learns from history.

It was March 2013 when the mid-cap rally came to a halt as negative sentiments hit the market over the issue of margin funding. As a concept-based investor, Mr Jhunjhunwala owned a lot of stocks with poor fundamentals. Already trading at high multiples, they succumbed and Mr Jhunjhunwala's portfolio crashed by Rs 10 billion. While the event made little difference to his wealth and stature, it was the poor retail investor who never recovered.

These are no different times. BSE Mid-Cap and Small-Cap Indices touched lifetime highs this month. These indices and stocks are trading at valuations that defy logic. The risk-reward ratio has never been so unfavorable. I won't be surprised if retail investors who recklessly mimic these so called 'gurus' get another rude shock.

Such a strategy is totally out of tune with most retail investors' risk and return profile. Even if they manage to enter the stocks at the right time, without having a solid reason to buy the stock, they would never know why and when to exit. And they will almost always lag behind the Guru when they do...hardly making any gains in the process.

In short, blindly following someone else's portfolio will not take you anywhere. But sticking to the philosophies of legendary investors can.

Rahul Shah and his team are doing exactly that with their Microcap Millionaires service. It follows the philosophy that is the product of decades of rich experience of the most brilliant mind in value investing - Benjamin Graham.

It is indeed the strict discipline and the right ideals and process that let Microcap Millionaire subscribers enjoy good returns across different phases in the market. Since inception in February 2014, the service has outperformed Sensex by a fabulous 59.7%.

As per Rahul, there's no reason why this simple strategy should not continue to beat the ridiculous hours and analysis most professionals spend per year analyzing stocks. Click here to know more.

02:30 Chart of the day

Earlier this year, the Indian Meteorological Department (IMD) had forecasted that monsoon rainfall during the period July to September 2016 will be 106% of the long period average (LPA), averaged across the country. The past data however showed that since 2012, India has recorded above normal rainfall only once. i.e. in 2013. A normal monsoon is critical since most of our farmers are still dependent on monsoon rains for their subsistence.

The rural economy has witnessed two consecutive draughts like situation in the past few years and most of the marginal farmers are saddled with huge loans on their failed crops. The Indian stock market however has remained buoyant on the backdrop of normal monsoons prediction. The markets have seen a steep rise since its February 2016 lows and are factoring in a full scale revival of the rural economy.

Vivek Kaul notes the rural economy is heavily dependent on agriculture. For agriculture to revive, there is an urgent need to address the problem of low crop yields and establish a proper marketplace for the farmers.

  • Agriculture no longer yields enough to feed the number of people dependent on it. The only solution to this is to improve crop yields (i.e. more production per hectare), ensure that the farmers are able to sell this increased production through a proper market which works and finally, people need to be gradually moved out of agriculture into doing other things.

    This is going to be a slow process because people dependent on agriculture simply do not have the required skillset to be moved to do other things, in most cases. Until then we will simply be dependent on monsoon rains.

The present market sentiments on the other hand seem to have discounted the future with regards to the economy and have not left any room for negative surprises. We believe this calls for extreme caution while investing in stock markets.

Monsoon Has Been Above Normal Only Once Since 2012


03:15

It is not just the secondary market that is close to lifetime highs. The primary market too is showing signs of hectic activity. After the announcement of ICICI Prudential Life Insurance planning one of the biggest issuances in nearly five years, Bombay Stock Exchange has also laid out its IPO plans. Asia's oldest stock exchange plans to raise an estimated Rs 12 to 13 billion via the IPO. The big issuances are bound to fetch investor interest. Not just because of the market optimism but also because the businesses to get listed are amongst the biggest in their space and new to stock markets.

Investors, however, should not get drawn to IPOs purely for the sake cashing in the possible listing gains. To better their chances of becoming IPO millionaires, rather than relying on what the management has to say, investors need to follow a checklist. Doing so will ensure that they buy only the best businesses at reasonable price. And have the conviction to hold on to the stocks irrespective of the listing gains.

Last but not the least, the IPO is not your final chance to buy the stock. Rather, it is the first. Do not skip the valuation criteria in your IPO checklist. Value the stock as you would value any other long-term investment for your portfolio. Ignoring valuations could undo the chances of making money from even the best companies getting listed.

04:00

Global markets witnessed sharp volatility during the week gone by. Stock markets in Brazil (down 2.8%) and US (down 2.2%), were the leading losers. However, Hong Kong and Singapore stock indices were among the leading gainers, registering weekly gains of 3.6% and 2.5% respectively.

Data released during the week suggested US jobless claim fell to a six-week low last week. This was recorded as the 79th straight week when claims remained below the 3,00,000 threshold, which represents a robust labor market. While the jobs data fueled optimism for the US economy, the services sector data came in below expectations. Data released during the week showed that the US services sector activity slowed to almost six and half year low in August. This was seen amid sharp drops in production and orders. While manufacturing and services sector remains constrained, sustained labor market strength has increased the chances of Fed raising interest rates later this year.

The European Central Bank (ECB) left its 1.7 trillion-euro stimulus programme unchanged at its policy meeting on Thursday, leaving investors disappointed. European countries have been reporting mixed data including German industrial orders this week that showed the steepest drop in almost two years. This led many market participants to speculate the ECB might take additional actions in order to stimulate Euro Zone growth. The decision came as a consensus among the policymakers. Policymakers at the meeting were of the view that there's no immediate danger to the euro-area recovery from risks including Britain's decision to leave the European Union (EU).

In the recent past, central banks across the world are trying to prod growth by operating near zero or negative interest rates and by introducing stimulus measures. However, are these measures viable? Asad Dossani, editor of Daily Profit Hunter, calls these measures the definition of insanity. He has also written on how one can successfully trade such events and build a trading business.

Back home, BSE Sensex closed up by 0.9%. On the sectoral indices front, Realty and Consumer Durables stocks led the gainers this week. On the other hand, stocks from IT stocks witnessed selling pressures. During the week, President Pranab Mukherjee gave its assent to Constitution Amendment Bill on Goods and Services Tax (GST). This, along with the bill ratified by more than 50% state assemblies, makes GST a law. With this milestone achieved, all eyes are now set on the formation of the GST Council.

For a detailed roundup of global markets during the week, click here.

Performance During the Week Ended 9th September, 2016

04:50 Weekend Investing mantra

"Risk comes from not knowing what you're doing." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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1 Responses to "Why This Stock Picking-Strategy is Doomed to Fail..."

jayanth

Sep 13, 2016

Spot on!.. Following buffet or big bull does.not ensure outperformane since the conditoms under which tjey bought the stock and sell it are.not "available" for normal investotrs

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