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Here's How You Can Beat Mutual Funds, Institutions, and even FIIs

Nov 21, 2015

In this issue:
» Date of AGM a pointer of company's profitability?
» Government's gold scheme turns in disappointing results
» Roundup of world markets
» ...and more!
0.00
Rahul Shah, Co-Head of Research

Benjamin Graham - a name admired seemingly universally by elite investors.

In a 2005 talk to students from the University of Kansas, Warren Buffett said of Graham:

  • You don't need another Ben Graham. You don't need another Moses. There were only Ten Commandments; we're still waiting for the eleventh. His investing philosophy is still alive and well. There are disciples of him around, but all we are doing is parroting.

Buffett's words are unmistakable. Graham's ideas on stock investing were - and remain - the best there is in the field of investing.

We recently listened to an interview Graham gave during his sunset years. He spoke about how individual investors stack up against large institutional investors in terms of the returns they can generate. After all, the latter have managers, huge resources, and superior access to information.

What Graham had to say may surprise you: He said individual investors have a big advantage over the large institutions.

Why?

Size.

Large institutions are constrained. They have a small range of stocks to choose from. They are forced to stick to 500-600 of the biggest companies.

Only these companies offer enough liquidity for large investors to go in-and-out of with ease.

Inevitably, then, intuitions concentrate their research - and ultimately their investments - on this overanalysed, overhyped group.

In contrast, individuals can choose from almost 4,000 stocks on the Bombay Stock Exchange alone. This breadth allows them to consider a wider variety of approaches and preferences, some of which may have the potential to deliver superior returns. Superior, that is, to the institutions...

Yes, this idea - taking advantage of the smaller, neglected companies - gives the individual investor a huge leg up. It allows them to scoop up undervalued stocks capable of delivering higher returns. Better yet, there's no competition from the big boys!

Make no mistake - this is as good as it sounds. We strongly believe that this idea - investing just a small portion of your portfolio in Microcaps - can make all the difference between good returns...and great returns!

So much so that we went ahead and created a service for our clients - Microcap Millionaires - centred precisely around Graham's ideas. And you will be glad to know that since its inception in February 2014, it has handily beaten the returns given by the Sensex. To be precise, when the latest report came out yesterday, our Microcap Millionaires portfolio was up a strong 64.9% as opposed to the 25.8% returns given by the Sensex during the same period. Looks like so far at least, Graham's ideas seem to be working.

Do you agree with Graham? Do you think investing in the smaller, more neglected stocks give you a big advantage over larger institutions? Let us know your comments or share your views in the Equitymaster Club.

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2.18

In every stock screening process, the aim is to weed out companies that do not fit the bill. We came across an interesting data point that seemingly would help in doing so, in a different way - based on which month a company holds its annual general meeting (AGM). As per an article covered by the Mint (based on a report by proxy advisory firm Institutional Investor Advisory Services) , return ratios of companies who delay their AGMs till the last minute tend to be poorer. The firm has data to back this up as well. Here it is:

Should investors look-down on cos that hold AGMs in September?

In the year 2015, 38% of the companies (whose accounting year ended in March) held their AGMs in the month of September. In 2014 and 2013 the same figure stood at 43% and 36% respectively. The business daily went on to observe that companies that have bad news could be delaying their AGMs in the hope of having some good news to share by the time the meet takes place.

Well...if that was the case, what would they have to say about companies which hold their AGMs in the month of June each year? While this data should be taken with a pinch of salt, we believe the investors should indeed be wary of investing in companies with poor return ratios, especially Return on Equity. This is because it is one of the most important measures to gauge profitability. And in case of companies which do earn high RoEs, investors would do well to make sure the same is not spruced up with the help of debt.

3.18

Looks like even the persuasiveness of Mr Modi is not enough to make Indians part with some of their gold. If the initial response to the gold monetisation scheme is any indication, the exercise has proved to be rather disappointing if not disastrous. The scheme has attracted only 400 grams of gold so far. While the Government is upping the ante by planning to rope in more jewellers as collection agents, we doubt whether this will dramatically alter the trend.

As Vivek Kaul, The Daily Reckoning editor rightly pointed out in a recent article, Indians like to hold gold in physical form and have a sort of aversion to gold in paper/demat form. Investing in gold for us is a lot about touch and feel. We are emotionally and culturally attached to it. And unless this psyche is broken, we don't think any amount of persuasion will separate us from our gold in a big way. Another way of lessening gold's allure would be to make other asset classes remunerative enough and also try and ensure that inflation is low and stable.

4.48

Global markets delivered a strong performance this week. Sentiment improved significantly after the minutes of the US Fed meeting last month were made public. These showed that the pace of rate hikes would be gradual. The S&P 500 index posted its best week in almost a year.

Markets have viewed the Fed minutes as a sign that US interest rate hikes won't affect the economic recovery. The first rate hike is now expected to happen at the December meeting of the Fed. In response, Gold prices fell to a five and a half year low of US$ 1,065 during the week before bouncing back marginally.

European markets shrugged off the attacks of Paris and closed positively for the week. The British FTSE, the French CAC and the German DAX all recorded strong gains as the markets expect more stimulus measures.

The Japanese economy formally entered into a recession, the fifth since the global financial crisis of 2008. However, the Japanese stock markets did not react negatively to the news.

The Indian markets also posted gains this week. The benchmark indices were up by around 1%. Barring IT and Realty, all sectors ended the week on a positive note. Stocks from the oil & gas and FMCG sectors were the biggest gainers for the week.

Performance during the week ended 20th November, 2015

4:56 Weekend mantra

"It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. We are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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1 Responses to "Here's How You Can Beat Mutual Funds, Institutions, and even FIIs"

Balakrishnan R

Nov 21, 2015

Using 5 Minute Wrap up as a marketing tool for something or other may be reduced.

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