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The Multibaggers We Don't Regret Rejecting

Dec 5, 2015

In this issue:
» Will Vulture funds find India's NPAs attractive?
» Yet another lacklustre year for gold
» India's money multiplier
» ....and more!
Tanushree Banerjee, Co-Head of Research

Back in the 1930s and 40s, Benjamin Graham was this famous deep value investor. One day, one of his assistants recommended an interesting stock to him. The company had the rights to a very promising new process called Xerography. As per the assistant, the new technology would be a rage. Therefore, the stock, at its then price, wasn't valued by the market.

However, in accord with his strict discipline, Graham decided to give the stock a miss. It simply did not fit into his valuation criteria. Well, what happened next was extraordinary. The stock, Xerox, went on to become a 100-bagger from the price at which Graham rejected it!

But Graham did not flinch! He very well knew that successful investing is not about identifying all the potential 100-baggers out there. In fact, it is about staying true to one's process and sticking to it no matter what.

We recalled this story once in the Research Digest (requires subscription). This was to drive home the point that investors should not take undue risks in the hope of pursuing every potential multibagger. Rather, sticking to a well-defined process could be good enough to see at least some of the stocks in the portfolio multiply several times.

Now, missing out on multibagger stocks is the last thing you would want to remember 2015 for. We often tell our Research Digest subscribers that for every stock we recommend we reject a handful. And it is not uncommon for some of the rejected stocks to do well. In most cases, the reasons for the outperformance of the rejected stocks are purely speculative. But cases where the rejected stocks have been multibaggers deserve a hard look. It is not about repenting on the misses but checking whether our processes are foolproof.

In fact, this is one of the biggest challenges we face on the research team. We need to fight our own inner demons so as to not bend the processes. I and Rahul have to also ensure that our team members do not venture outside the processes that we have defined for each of our services. Of course, mistakes are an inevitable part of investing. But by sticking to well defined processes, we at least have a better idea of why things went wrong. This then helps us take remedial measures the next time around.

Fortunately, when we checked the list of stocks that offered over 100% returns in the past 12 months, there was no remorse. Of course, we rejected most of these and never featured in our recommendations. Probably many never will. But it at least assured us that we had stuck to the processes well.

Like in the case of newly profitable aviation stock Spicejet, the rise in stock price for most of 2015 multibaggers had little connection to their long-term valuations and sustainable profits. Therefore, the chances of these passing through our recommendation processes were negligible.

However, is it not okay to step out of our processes once in a while? Especially when we see near-term trends, such as oil prices, offering a very promising outlook on a stock? Of course it is. But by doing this, we would be potentially stepping outside of our circle of competence and subjecting subscribers to the mercy of their luck rather than using our own stock picking skills.

Doing well in stocks is not about some unique insights. But as Charlie Munger likes to say, it is all about preparation, discipline, patience, and decisiveness. So if you are cursing yourself silly over missing any multibaggers this year, it may be comforting to know that even someone like Graham was not immune to this. As far as we are concerned, we would simply learn the lessons from the missed multibaggers, if any, and move on.

Are there any good performing stocks that you regret missing out on? Let us know your views or post them on Equitymaster Club.

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2.10 Chart of the day

As per calculations of Bloomberg and Mint, India's money multiplier ratio is 5.8. This means every one rupee of central bank money in India is able to generate around 6 rupees of money supply in the economy. India's ratio remains lower than that of Europe, but higher than that of the US.

A country's money multiplier depends on two factors-how much individuals (and businesses) hold in cash and how much banks hold as reserves. The more individuals hold cash in hand, the less the banking system will be able to create money. Hence a lower value for the multiplier. In other words, cash in hand acts as a leakage for the banking system.

Thanks to financial inclusion and penetration of banks, India's money multiplier ratio has improved over the years. In 2002 when Indian's held almost 18% of their financial assets in cash, the ratio was at 4.6.

As per latest data from RBI, in FY15, Indians held 10.7% of their financial assets in cash and the money multiplier ratio was at 5.8.

We always recommend that investors should decide their exposure to equities, which is only one part of the overall investment portfolio, after they have kept aside some cash. While we are no experts in wealth management, we believe keeping aside some safe cash is absolutely necessary. Not only will this cash take care of your liquidity needs, but it will also come handy during market declines. Particularly when there will be opportunities to pick up fundamentally strong stocks at cheap valuations. For some of you this cash component could be 6 months of usual monthly expenditure, for others 36 months. You need to decide what amount works for you, and then set it aside. Maybe in a FD, or in a pure liquid fund. Or maybe just cash at home!

Cash remains a reasonable proportion of financial assets
 Cash remains a reasonable proportion of financial assets


Speaking of banks, the noose of stressed assets around Indian banks shows no signs of loosening. For every hundred rupees that the industry has lent, more than ten has been deemed difficult to recover. The result being lending has slowed to a crawl, emerging as one of the biggest hurdles to economic growth. There are of course ways and means to get rid of these stressed assets. They can be traded with other lenders or also sold to asset reconstruction companies.

Now, thanks to the country's central bank, another option has been added to the mix. The option of selling these assets to foreign investors. That's right. Indian skies, those of the banking industry to be precise, have been thrown open to vulture funds that can circle the landscape and scoop down on assets where they think they can make a bundle. Nothing wrong with the move we believe. However, there are huge regulation related challenges that need to be addressed first. As LiveMint rightly points out, legal wrangles allow creditors to typically recover less than 26 cents on the dollar in India. This compares poorly with more than 80 cents in the US. Therefore, unless issues like these are addressed, foreign investors may not turn up in large numbers.


In the absence of any earnings that gold generates, its investors are confined to movements in its price for making money. And those movements haven't been very favourable in recent times. As a Financial Times report points out, gold is on track for its third consecutive year of ending lower than it started the year at. In fact, yesterday it touched its lowest level since early 2010. The possibility of a US rate hike along with decelerating growth in China are huge dampeners to demand for the yellow metal. This as higher US interest rates boosts returns for savers and China slowing means lesser fears of inflation going out of control.

Even as these developments take place, India is busy trying to convince rich temples to deposit a part of their stack of gold with banks as part of the government's gold deposit scheme. This, it hopes, would help cut imports of the metal. Nevertheless, reports indicate that the scheme has only attracted about one kilo in a month's time. And as things turn out, these temples remain skeptical to do so. Looks like the government may have to go back to the drawing board as far as the gold deposit scheme is concerned.


The European markets ended the week in negative territory after the European Central Bank chief offered up a round of additional stimulus measures that fell short of investor expectations. It also chose not to boost the amount of government bonds it buys each month through its stimulus program, which aims to help the economy by cutting loan rates. Instead, the ECB extended its bond buying for six more months at the same level until March 2017.

The US markets ended weak on expectations of a rate hike by the US Fed in mid-December. The US November jobs report will be the critical signal for the Fed before its meeting on 15 December 2015.

Barring Japan and India, major Asian markets ended the week on a positive note. China ended the week on a buoyant note with benchmark indices closing higher by 2.6%. However, Japan stock index fell by 1.9% during the week owing to weak economic data.

Back home in India, benchmark indices fell by 1.9% during the week following the global sell-off. Investors remained wary of Fed rate hike fears post comments from the Fed chief Janet Yellen.

Performance during the week ended 4 December, 2015
 Performance during the week ended 4 December, 2015

4.50 Weekend Investing mantra

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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