Beware of Stories That Could Trim Your Portfolios Returns - The 5 Minute WrapUp by Equitymaster
Free Reports

Beware of Stories That Could Trim Your Portfolios Returns

Dec 21, 2015
In this issue:
» Small cap stocks biggest winners and losers in 2015
» Market roundup
» ...and more!
00.00
Richa Agarwal, Research analyst

Let me tell you a story.

The six words could be the most powerful to catch someone's attention. I bet they immediately made you sit straight, eager to read further.

Stories capture imagination, tap into emotions, and make it easy to form an opinion... A good story is irresistible.

Businesses thrive on stories. Some of the most successful brands were launched on the back of powerful stories. And stories have funded some of today's most disruptive startups. It's no wonder consultancies are making money from clients who want to benefit from effective storytelling.

The world of financial services is no exception to all this. Indeed, it is full of storytellers - the brokers, the markets, the economists, and even the managements. They all shape the opinions and decisions of investors.

Unfortunately, at times, their stories are far from reality. The one that seem to fool people are also the the loudest and most far-fetched.

There is no dearth of investors who have been trapped by strong story lines. Remember the dot com bubble? The narrative was strong enough to draw huge money to equity funds...to be followed by one of the worst financial crises.

Back home, a case in point is the popularity of IPOs of companies with bottomlines in the red and no convincing business model.

Last year, the story that swept the markets and helped the Sensex touch an all-time high was the acche din and recovery theme. A year later, with corporate performances undermining the theme, investors seem to be waking up to the realities.

Stories have a natural convincing power. So much so that at times they can disarm logic and yet make a lasting impression of the message they want to communicate.

As analysts who always meet managements before we recommend companies, we certainly come across a few that are good at unwinding a spool of well-connected words to weave a great investment case.

Yet, as we dig deeper and try to get to the how and when of it, it all looks tangled. This is truer in the cases of complex and B2B businesses where information sources are limited. And all you have to rely on is the management outlook.

While we have nothing against the art of effective communication, when it is all words with little data to support the story and little evidence when cross-checked with other industry sources, we do not mind giving it a miss.

Unlike the stories from our growing up years, believing in ones that have your hard-earned money at stake may not make for a fond memory. As such, beware of narratives. Focus on facts and reasoning. While not everything about a successful business is quantifiable, strong stories are no substitute for quality. Have a process and disciplined investing approach that leaves little scope for storytellers to incite an emotional response - be it fear or greed. Else for every false story you fall for, you will have a bitter story to tell.

Are your investing decisions often influenced by strong 'storylines'? Let us know your comments or share your views in the Equitymaster Club.


--- Advertisement ---
Do You Know This SECRET To Increase Your Investment Returns?

Let's face it... Investment advice is dime a dozen.

But even at that price, is it worth it?

For example, most people will tell you small caps are risky and you should stay away from them.

Yet, certain small caps have gone on to deliver returns like 139% in seven months, 100% in one year one month, 241% in three years three months, 126% in eleven months, 79% in four months, 2,263% in six years and three months, 832% in five years eight months, and more.

Wouldn't you want to benefit from such recommendations too? Or would you just ignore it because somebody told you small caps are dangerous?

For more than seven years, we at Equitymaster have been recommending our subscribers high-potential small caps.

And the returns you just saw are from just some of our small cap recommendations.

Click here to see how YOU too could benefit from high-potential small caps regularly...
------------------------------

3:00 Chart of the day

The calendar year 2015 has largely been a disappointing year for investors in the Indian stock markets. The benchmark BSE-Sensex is down about 6% this year. But this was not the trend across the board.

We came across some interesting statistics reported by The Hindu Business Line. As per the business daily, 10% of the stocks listed in the Bombay Stock Exchange delivered 100% or more returns between 31 December 2014 and 17 December 2015. 40% of the stocks delivered returns in excess of 20%. 50% of the stocks gained 10% or more.

It is noteworthy that about 95% of the stocks that delivered 100% or more returns belonged to the small cap space.

Today's chart of the day shows the top five gainers of the year - Mangalam Drugs & Organics Ltd, Uniply Industries Ltd, Cupid Ltd, Keerthi Industries Ltd and Himachal Fibres Ltd.

Which Stocks Delivered Highest Returns in 2015?

Had you invested Rs 1 lakh in each of these five small cap stocks, your total investment of Rs 5 lakh would have been worth a massive Rs 57 lakh! In other words, your investment would have multiplied 11 times in less than a year's time.

We talked earlier about the power of storytelling. Isn't the story that we just narrated a tempting one? Don't we all want to become rich, and fast?

Our experience in researching small cap stocks tells us that you could be in for big trouble if you just look at the rosy returns. When my team and I shortlist stocks for our Hidden Treasure small cap stock recommendation service, we do a thorough analysis of the company's business model, financial health, growth prospects, profitability management quality, and so on.

We just took a cursory glance at the financials of some of the small cap stocks that have delivered multi-fold returns in 2015. We noticed that some of these companies are loss-making...or have just turned profitable after some years of losses...or have very poor profitability.

While small cap stocks have been the biggest winners in 2015, they also lead the list of biggest losers. For instance, among the stocks that crashed 50% or more this year, nearly 97% belong to the small cap category.

So, the small cap space is a high-risk high-return zone and must be treaded cautiously.

We recommend you read this earlier 5Minute Wrapup edition titled The Art of Investing in Small Cap Stocks.

4:15

The Indian stock markets have been trading on a positive note. At the time of writing, the BSE-Sensex was trading higher by about 175 points (+0.69%). Barring consumer durables and healthcare indices, all sector indices are trading in the green with banking and metal indices leading the gains.

4:45 Today's Investing mantra

"Risk comes from not knowing what you're doing." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst) and Ankit Shah (Research Analyst).

Today's Premium Edition.

Valeant Partners with Walgreens - Impact on Indian Companies

This pharma company's move could have negatively impact some Indian companies.
Read On...Get Access

Recent Articles

You've Heard of Timeless Books... Ever Heard of Timeless Stocks? August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs' August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "Beware of Stories That Could Trim Your Portfolios Returns". Click here!

1 Responses to "Beware of Stories That Could Trim Your Portfolios Returns"

RAVI KATARI

Dec 22, 2015

Ultimately, it comes down to everyone's desire to earn better than what you get from a fixed deposit in a bank. The promoters sell a story that is supported by AD agencies and the Moneymen and they are never around to explain why a particular IPO bombed so disastrously. there is no single Magic Pill and the price of reasonable security is eternal vigilance.

Like 
  
Equitymaster requests your view! Post a comment on "Beware of Stories That Could Trim Your Portfolios Returns". Click here!
DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
  2. Neither Equitymaster, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Equitymaster's Associate has financial interest in Sun Pharma.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  5. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.