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Here's how 2-hr investing can beat 200-hr investing

Nov 6, 2014

In this issue:
» The mantra of LIC's success in stock markets
» The secret of making huge returns in stock markets is...
» This is how organizations evade taxes....
» ...and more!


00:00
 
How likely it is that you instantly pick up a book titled 'The 4-hour workweek'? Quite likely, isn't it? Well, you are not alone. This is exactly what people across 33+ countries have done and catapulted the book to the #1 New York Times, Wall Street Journal, and Business Week bestseller!

In fact, the success of the book so inspired the author, Tim Ferriss that out came another two books with a similar sounding name 'The 4-Hour Body and 'The 4-Hour Chef'. Needless to say, even these books turned out to be best sellers.

We wonder what Tim Ferriss will come out with next? A book on successful long-term investing by putting in the least possible effort? How about 'The 4-hour investing'?

Well, if you ask us, he doesn't have to do that. For this secret has already been figured out. As a matter of fact, it takes so little time that it can easily be called 'The 2-hour investing'.

We think it was one of the fifth century Greek writers who once said that as he grew older and wiser, his books got shorter and shorter.

He would have certainly envied the sage of value investing Benjamin Graham.

And while Graham didn't write a book much shorter than his widely known classics, his views on investing did change towards the fag end of his life. Much like what the Greek writer suggested.

Now people of course keep refining their views as they gain more experience. But its rarely the case where a person loses most of the interest in his earlier work. Especially when the work becomes the benchmark in its chosen field.

And this is precisely what happened with Graham. In an interview he gave in the year he passed away, he openly admitted that he had lost most of the interest he had in the details of security analysis.

Coming from Graham, that was indeed a profound statement! Thus, the idea of detailed analysis of an individual stock was replaced by the one where one requires only few techniques and simple principles.

And now we know why he didn't come out with a book explaining his new found approach. Simply because all that the book would have filled was half a page with the following three steps:

Step 1: Buy a basket of 30 cheap stocks based on either PE, P/BV and dividend yield such that all the stocks have D/E ratio of less than 1

Step 2: Sell any stock that goes up between 50%-100% or two years whichever is earlier

Step 3: Always have minimum percentage of total portfolio in stocks or bond equivalents. If markets are cheap, have 75% portfolio in stocks and if they are expensive have 25% in stocks with the remaining in fixed deposits

That's it! That's the shortest investment book you'll ever read and with long term results that literally knocked the daylights out of the index returns! As per Graham's own calculation, over a 50 year period, a portfolio of this kind performed twice as better as the index!

And here's the real clincher. When we tested out this simple formula on Indian stocks, the point to point returns were a whopping 320% as opposed to a mere 40% returns given by the Sensex!

Reasons enough we believe to launch a new service called Microcap Millionaires based predominantly on the simple rules that Graham highlighted and some qualitative criteria of our own. Needless to say, we haven't been disappointed. Cumulatively, the service is up 53% as against the 35% returns given by the Sensex.

We are of course not saying that the strategy will do well in all years. It will certainly have years when it will underperform, but over the long term, the sound logic and the excellent supporting record that this strategy has should surely tilt the scales in the favour of the investor who has the character to stick to the rules.

Hence, there's no reason why this simple strategy that needs no more than 2-hr per year should not beat the 200 odd hours most professionals spend per year in analysing stocks.

Do you think the 2-hr investing approach is much more effective than the 200-hr approach? Let us know your comments or share your views in the Equitymaster Club.

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02:50
 Chart of the day
 
If you would have noticed, the starting point for the Graham strategy that we highlighted in the lead is a basket of cheap stocks. In other words, one has amongst the best odds of beating the markets if one gets in at valuations that are extremely attractive. In fact it is not just Graham. Numerous studies on which kind of stocks perform the best over the long term have proven this. One such study was also conducted by us and is highlighted in the chart below.

As can be seen, if one went back in time to October 2003 and evaluated which kind of stocks have done the best over the next 10 years, it were indeed the ones that had the lowest price to book values of the entire universe. The reasons are not hard to find. Given that investors routinely tend to value stocks based on fear and greed and not rational thought, the ones that are out of favour usually trade much lower than their long term intrinsic values. Thus, investing in such stocks by taking a contrarian approach is likely to increase one's odd of outperforming as Graham highlighted.

The big advantage of buying cheap

03:15
 
Talking about stock picking & sensible investing let us see how LIC, one of the largest institutional investor, has been playing its cards here. Of late, it started following a contrarian strategy. A strategy which helped it earn Rs 100 bn in profits over the last 4 quarters!

Basically, a contrarian strategy involves buying shares of sound companies at beaten down prices when the street has a negative view on them. However, this strategy is not as foolproof as it is deemed out to be. It is for a reason that Warren Buffett said "A contrarian strategy is as foolish as a follow-the-crowd strategy."

So, what is the biggest risk here? Well, a contrarian approach is plagued with value traps. Buying something just because it is cheap is no guarantee for success. In fact, one should dwell deep in understanding why the stock is trading cheap. This is where the ability to correlate valuations and business fundamentals comes into play. Here is where Rahul Shah and Taha Merchant, who head our Microcap Millionaires initiative, focus all their energies on. And look out for those uncanny bargains that have a perfect blend of sound fundamentals and attractive valuations.

03:45
 
No discussion on stock investing is complete without the mention of management quality, corporate governance and ethics. These are the three pillars based on which an organization moves ahead. We all are perhaps aware about the governance standards of Indian companies. Remember, how Satyam went burst post receiving the golden peacock award for best corporate governance!

For the time being, forget domestic malpractices. To your surprise even foreign companies are not far behind when it comes to unethical wrong doings. As per an article in Economic Times, more than 100 big companies have brokered secret deals with Luxembourg to avoid paying taxes. Names like PepsiCo, IKEA and Deutsche bank appear on the list.

While the tax deals appear to be legal and legitimate on paper it is believed they were structured purposefully so as to appear complex in character thereby enabling companies to reduce their tax bills. Luxembourg, being tax friendly in nature, many companies figured out ways to establish their presence there and take tax benefits. It would be interesting to see what course of action is taken against these big-wigs which have strategically siphoned off government money.

04:30
 
The Indian stock markets are closed today on account of Guru Nanak Jayanti. Asian equity markets were trading mixed. Korean and Japanese market were out of favour. European markets have opened the day on a mixed note as well. Athex composite index was the biggest gainer in the opening hours of trade today.

04:55
 Today's investing mantra
"If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Jinesh Joshi and Rahul Shah.

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3 Responses to "Here's how 2-hr investing can beat 200-hr investing"

bishwa nath chaubay

Nov 7, 2014

what to buy for intraday

Like 

Frederick

Nov 6, 2014

Buy a basket of 30 cheap stocks based on either PE, P/BV and dividend yield such that all the stocks have (D/E) ratio of less than 1
What does D stands for?

Like (1)

Mandar

Nov 6, 2014

I guess you haven't read the revised edition of the Intelligent Investor, especially the notes part by Jason Zweig. That's why you are giving a "secret" formula to beat the market, with 3 steps...especially when the market is up.
Maybe will help to read "THE TROUBLE WITH TIMING" by Jason Zweig that is available online.

Like (1)
  
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