X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
An Enterprising Zebra in Lion Country... - Views on News from Equitymaster
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

An Enterprising Zebra in Lion Country...
Jun 8, 2016

Today's thought experiment was inspired by the works of Ralph Wanger, a small-cap fund manager.

Let's begin.

Imagine portfolio managers as zebras and Mr Market (aka Volatility) as a roaring, ferocious lion.

Fund managers and zebras have a few similarities. While the manager strives for above-average performance, the zebra wants fresh grass. Both dislike risk. Managers can be fired. Zebras can be eaten by lions.

Furthermore, zebras and fund managers both think and move in herds. Zebras look alike, think alike, and stick close together. Just like fund managers.

For a zebra, a key decision is where to stand in relation to the rest of the herd. When things are safe, the outside of the herd is the best. That's where the fresh grass is. Meanwhile, those in the middle eat grass trampled upon (and worse) by the other zebras.

The enterprising zebras on the outside eat better. However, there will come a time when a lion approaches. The outside zebras will be the lion's lunch. The skinny zebras in the middle of the pack may eat a bit less, but they are still alive.

  • A Lion does not ask permission before he eats a zebra. Lions cannot talk and zebras will not listen. - House of Cards

Think about it...

Mutual fund managers cannot afford to be an outside zebra. For them, the best strategy is simple: Stay in the centre of the herd at all times.

As long as they continue to buy popular stocks, they cannot be faulted. Look at an index heavy weight, Reliance Industries.

Now, Reliance Industries had a market capitalisation of more than Rs 3.5 lakh crore in 2010. Its market cap in 2016 is slightly less than 3.10 lakh crore. So if you bought Reliance in the past six or seven years, you did not make a dime. In fact, you lost money.

But even more surprising is that all the major fund houses continue to hold a huge chunk of Reliance in their portfolios. Why?

Is it because they believe in the company's long-term performance. Well, how long is 'long term'? As John Maynard Keynes says, in the long run, we're all are dead.

These fund managers are not questioned or grilled on their stock pick because for mutual fund managers, it is better to fail conventionally than try to succeed unconventionally.

We can imagine these managers boasting to each other at a party about how they would rather buy a big known company than try to look for some untested company fearing failure. They failed anyways...

Our pledge at Equitymaster is to be an enterprising zebra. We look out for opportunities that will help our investors earn above-average returns while taking below-average risk. In our drive to eat the fresh grass, we have earned our share of scars from the lion (Mr Market). We flaunt them openly and proudly. You will always find us willing to succeed unconventionally.

"It is okay to look stupid as long as you aren't."

Rohan Pinto

Rohan Pinto (Research Analyst), Managing Editor, ValuePro and Smart Money Secrets, holds a bachelor's in engineering and a master's in finance. He is a practitioner of value investing philosophy inspired by Warren Buffett and Charlie Munger. Being a voracious reader, Rohan believes in the philosophy of mastering the best of what other people have already figured out. In his pursuit of worldly wisdom, he has constructed a multidisciplinary mental models framework, which he believes aids in effective decision making. His search for outstanding stocks is driven by a relentless pursuit of learning from the greatest living investors and the eminent dead.

Equitymaster requests your view! Post a comment on "An Enterprising Zebra in Lion Country...". Click here!

2 Responses to "An Enterprising Zebra in Lion Country..."

Abhishek

Jun 21, 2016

liked it...good article..

Like 

Manoj

Jun 10, 2016

Good one.. !!!

Like 
  
Equitymaster requests your view! Post a comment on "An Enterprising Zebra in Lion Country...". Click here!

More Views on News

What They Forgot to Tell You About Sensex at One Lakh (Smart Contrarian)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

India Has 8.4 Crore More Workers in Agriculture Than is Economically Feasible (Vivek Kaul's Diary)

Dec 12, 2017

A new NITI Aayog discussion paper points this out.

Here's How Tax Evasion Will Be Curbed In Times To Come (Outside View)

Dec 11, 2017

PersonalFN explains the measures the Income-Tax Department plans to curb tax evasion.

Using Deposits to Rescue Banks is a Bad Idea; It Needs to Be Nipped in the Bud (Vivek Kaul's Diary)

Dec 11, 2017

The Financial Resolution and Deposit Insurance(FRDI) Bill proposes to do just this.

More Views on News

Most Popular

Basics of Value Investing

Value investing is very simple in essence. But you need to know the rules of the game. Here are some interesting articles tha...

Dine with Ivanka; Waltz with Salman!(The Honest Truth)

Dec 1, 2017

A Saudi template to solve Indian government's tax deficit problem.

If You're Not Looking for 'Excitement' but 'Big Returns' from Stocks, This Is for You(The 5 Minute Wrapup)

Dec 7, 2017

One does not have to necessarily invest only in 'exciting' stocks to become wealthy.

Using Deposits to Rescue Banks is a Bad Idea; It Needs to Be Nipped in the Bud(Vivek Kaul's Diary)

Dec 11, 2017

The Financial Resolution and Deposit Insurance(FRDI) Bill proposes to do just this.

Beat Fund Managers at Their Own Game with These Stocks(Smart Contrarian)

Dec 6, 2017

The road to big investment gains passes through this universe.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Dec 12, 2017 11:45 AM

MARKET STATS