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A Technique ALMOST Guaranteed to Give You Great Returns

Dec 19, 2015

In this issue:
» India's growth projection scaled down
» Weekly round-up of global markets
» ...and more!
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Rahul Shah, Co-Head of Research

Back when I was doing my MBA, a lot of professors couldn't stop praising the book Good to Great. A lot of corporate czars also swore by it. When I checked it out myself, I too walked away pretty impressed with its key findings. After all, who could challenge the assumption that, to make your company successful, you should replicate the strategies of the world's most successful companies?

Well, Michael Mauboussin has challenged it. He argues that one cannot replicate success by studying only the most successful companies. This would be akin to lighting a thousand of the exact same light bulbs and then concluding that the few bulbs that lasted the longest had something unique to them.

Some companies do indeed reach the finish line, but how do you explain the ones that had the same strategy as the winners' yet still faltered somewhere along the way?

We do not doubt the intentions of the authors of Good to Great. However, as Mauboussin observes, you can't just sample the winners. You should sample the entire universe and determine which of the winners used the same strategies.

Isn't this also true of investing? It's easy to be taken in by the recent track record and charisma of an investor and start following his methods blindly. However, it is quite possible that his success is more luck than skill. Therefore, it is crucial to determine if his method has worked over much longer time frames.

The longevity of an investment method is one of the most important filters. If an investing method has proven to be successful over at least ten years and through one market cycle, then it is certainly worth giving a closer look.

Another important filter is the number of investors using the method and how many of them have been successful over 10-12 years.

The discipline of value investing passes both of these filters easily. In 1984, in a tribute piece to his mentor Benjamin Graham, Warren Buffett wrote that the investors with the best long-term track records all drank from the same intellectual river - a definite pattern that luck cannot explain.

His point was that most of the investors with stellar 10, 15, and 20-year track records were all value investors who followed the philosophy of Benjamin Graham.

The conclusion? Value investing works over the long term and those who follow the method with the discipline it requires can really do wonders over the long term.

Please note we are not saying other investment methods don't work. But the preponderance of value-investing success stories over the long term make the method difficult to dismiss.

What do you think? Is value investing the best way to build wealth over the long term? Let us know your comments or share your views in the Equitymaster Club.

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2.20 Chart of the day

In its mid-year review of the Indian economy yesterday, the finance ministry has lowered its projection of the country's growth in the current fiscal year by an entire percentage point. It is now expected that the economy will grow by 7% to 7.5% from the 8.1% to 8.5% expected earlier.

And with that, the realisation that the economy is not going to recover as soon as everyone was expecting is slowly but surely permeating within the system. In our interaction with the managements of numerous companies, one central theme that seems to be becoming clear is that low capacity utilisation across industry and the resultant lack of private sector investment is one big sore point pulling the economy down. Rapidly slowing exports are emerging as another pain point.

Nevertheless, as today's chart of the day makes amply clear, for all the challenges we face as an economy, India is still a bright spot of growth in the globe. Even amongst emerging economies like the BRICS nations, India comes out on top as far as our pace of growth is concerned.

Despite lower growth estimates, India still a bright-spot

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Coming back to revised projections of India's GDP growth, the government also feels that it may not be able to meet the fiscal deficit target of 3.5% in FY17 given the growing pressure on its finances. As per the government, higher outflows due to the implementation of the Seventh Pay Commission, and higher public spending to boost growth are likely to stretch its finances particularly as the subsidy gains from low crude prices are likely to diminish in the future. Even the declining GDP growth is likely to curtail its revenue collection going ahead.

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Meanwhile, major global markets witnessed considerable volatility in the week gone by. The historic event of the first interest rate hike by the US Fed in about nine years pulled markets in opposite directions. While the Chinese market was the top gainer, the Brazilian market was the big loser this week.

Crude oil prices fell to levels last seen in 2009 and worries about the US junk bond markets has also affected sentiment.

The US market fell sharply on Friday, to end the week in the red. Trading volumes on Friday were the second highest of 2015. The Japanese market ended lower for the week due to a surprising move by the Japanese central bank to expand its stimulus measures.

The US Fed's rate hike did not damage sentiment in the Indian equity markets. The key benchmark indices closed nearly 2% higher for the week.

Performance during the week ended 18 December, 2015

4.45 Weekend investment mantra

"The stock market is a device for transferring money from the impatient to the patient." -Warren Buffett

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

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2 Responses to "A Technique ALMOST Guaranteed to Give You Great Returns"

SACHIN

Dec 20, 2015

Best ever analysis

Like 

william

Dec 19, 2015

I used to invest with the value investing method previously for the long term. But I found that the share price was rising for most of the time and all of a sudden profits were getting wiped out partially. Hence I modified the method and started booking profits when I got more than reasonable profits. This method proved more beneficial where there was trader pressure and in stocks which were news driven. I am making more than reasonable profits now by booking my profits whenever I feel that the share price has run ahead of fundamentals. Thanks

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