Have You Made or Lost Money Over the Last Five Years?
(Nov 2, 2015)
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In this issue:
» China still the best emerging market index over three years
» Aviation stocks have investors all excited, should you follow?
» ...and more!
Investors aren't too excited about stocks these days. At least not as much as they were in the glory days of 2007 and 2010. It's not as if the stock markets have done badly. The BSE-Sensex is up about 33% from where it was five years back. And the average five-year return from the universe of recently traded stocks (that were being traded during the week gone by) has been about 78%. Not that bad.
So what gives?
We dug a little deeper to find the answer. And we quickly realised that these broader numbers hide far more than they reveal.
Sample this: Out of the 3,042 stocks that were traded on the Bombay Stock Exchange exactly five years back, only 2,624 were traded during the week gone by.
And while the average five-year return from these 2,624 stocks has been 78%, here's a startling fact: 1,466 of these stocks trade at a lower level today than they did five years back! That's more than half the stocks! When investors in more than half of all the stocks are sitting on losses after five long years, you know the results haven't been pretty.
But it gets worse...
If you believe stocks should give a compounded return of at least 15% per year to be worth the risk, you should know that almost 80% of these stocks have delivered compounded five-year returns of less than 15%.
That's quite a sorry number indeed. The average stock has had a tough time over the last five years.
So what went wrong?
In our view, the results emphatically point towards two strong conclusions:
- Any company, no matter how good its story, is not worth an infinite price. You have to be very careful about the valuations you pay for stocks. The markets, at this time five years back, were quite exuberant. And while the valuations of the broader indices where not stratospheric at the time, many individual stocks were seeing exorbitant valuations. And the results of our study highlight how indiscriminate buying at such times can lead to poor results.
- The importance of buying fundamentally sound businesses should never be overlooked. When things are going great, as they were in October 2010, investors are quick to throw caution to the wind. And the first to go out of the window is usually fundamental analysis. Seeing everything under the sun go up, investors are quick to jump to the conclusion that 'fundamentals don't matter'. Companies with speculative business models, high debt, shady promoters...anything goes. But as the markets sober-up, the chickens come home to roost. They always do.
Therefore, the results of our study are not as pessimistic as they might initially seem. For they do not speak about stocks as being a good or bad asset class. Instead, they speak volumes about how taking the wrong approach to stocks and stock picking can lead to disappointing results, even over the longer-term.
How did your portfolio do over the last five years? Did you make or lose money in the stock market? Let us know your comments or share your views in the Equitymaster Club.
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Negative headlines around the Chinese economy are dime a dozen these days. Experts are wondering whether the dragon nation's march towards prosperity has slowed down for good. The country's recent decision to scrap its one child policy is widely seen as an acknowledgement of this fact even by the country's policymakers. However, as today's chart of the day highlights, all of these factors have not deterred the country's stock market from emerging as the best performing amongst the BRICS pack over the last three years.
With a CAGR (compounded annual growth rate) of 18%, the Chinese benchmark index has done much better than the other major emerging markets over a three year period. Of course, it is a different story altogether that the genuineness of this stock market rally, especially over the last one year or so, is itself under question.
With gains of 14% per year, the Indian stock market index isn't far behind its Chinese counterpart. And unlike China, there isn't any big question mark over how genuine it is. However, a big chunk of these gains have in expectations of big bang reforms from the current Government at the centre. The pace of the same however has remained painfully slow this year. Should the situation not reverse itself in the coming few months, investors would certainly start getting more and more jittery.
China the best emerging market index over 3 yrs
Looks like investors can't get enough of the aviation space these days. We all know Interglobe Aviation, the holding company of Indigo Airlines, India's largest and also its most profitable airline company closed its IPO recently and quite successfully at that. A leading daily has now reported that Rakesh Jhunjhunwala, arguably one of India's most successful investors, has picked up a 1% stake in Jet Airways, India's second largest carrier. This move comes nearly a year after Jhunjhunwala bought 1.4% in SpiceJet, another airline entity. Looks like Jhunjhunwala is betting on a turnaround of sorts in the Indian aviation space. As a matter of fact, he is not alone. Quite a few other experts have also pointed towards the improving macro factors that can make the sector's companies do really well over the medium term.
We are not so sure this is the right approach to take. Airline is one sector that we believe suffers from the famous Warren Buffett analogy of cockroaches in the kitchen. No sooner do you kill one, another one emerges. In other words, there are too many things that are beyond an airline company's control and that need to go right in order to make sustainable profits. Consequently, the odds are not at all stacked in favour of the investor looking to make long term wealth in airline stocks. Will investors like Jhunjhunwala be able to overcome these? We guess only time will tell. History though is not on their side.
Indian stocks are trading weak today with the Sensex lower by more than 200 points at the time of writing. Losses were largely seen in metals and capital goods stocks. Autos however were seen bucking the trend.
"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." - Warren Buffett
|| Today's investing mantra
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