'What courses should students take if they want to become successful investors?'
This was a question put forward to the value investing legend Warren Buffett during one of his company's AGMs. And as is the case with most of the things he does, the Oracle's answer was all simplicity. He was of the view that in order to be a successful investor there are only two things that matter. And these are the ability to value businesses and an understanding of how the markets work.
Research analysts, are supposed to be ' a tribe of professionals who work hard to carry out the twin responsibilities of valuing businesses and understanding markets'. And that too in the most objective manner possible.
Alas, that's not always the case.
There's a mountain of data out there to suggest that research analysts don't necessarily work in the best interest of investors. This is because they don't earn their incomes based on how many right and wrong recommendations they make. Instead, they are based on how many feel-good reports they wrote about the client who has other business relationships with the firm these research analysts work for.
In other words, the same companies they write about... determine their incomes.
It is natural for objectivity to get tossed out the window and the interest of the small, retail investor to get quashed under such a scenario.
This is not all. Their incomes also depend on brokerage revenues. This means that the more they make an investor transact in stocks, the higher the brokerage revenues and consequently, higher the incomes they take home. This is again not in the best interest of individual investors. For stocks are not pieces of paper but part ownership in a company and one cannot keep switching real, life and blood businesses frequently for the sake of slightly higher brokerages.
We have neither any brokerage arm that compels clients to churn portfolios frequently nor do we care about companies getting displeased with our reports for we are totally committed to our subscribers. In fact, we have even been turned away by few companies with the excuse that we would not make any difference to their market capitalisations.
But none of this has deterred us. For success in the area of stock research does not come with having good relationship with clients nor does it come with hiring star analysts. As Buffett pointed out, what matters is good old common sense and a fiercely independent thought process not coloured by any hidden agenda.
If investing isn't about buying a stock at a discount from the determinable intrinsic value of the company, then it can't be anything else.
This cardinal principle, propounded first by Benjamin Graham, the father of value investing, stands as strong today as when it was first introduced about 7-8 decades ago. In fact, if anything, its appeal has only increased, reinforced by the numerous success stories that the discipline has spawned. None bigger than that of Warren Buffett, who is one of the richest men in the world, solely on the basis of few value investing principles handed down to him by Benjamin Graham and the ones that he steadfastly stuck to.
At Equitymaster, we are totally devoted to value investing and would not ever give up this approach for anything else.
Our sole aim is to find companies with strong competitive advantages, impressive past track record and an honest and capable management team that are trading at a discount from their intrinsic value and recommend them to our subscribers.
However, we've not restricted ourselves to just recommending stocks. We are also firm believers in investor empowerment and consequently, through the platform that our website offers us, we've written copious amount of material on sensible, long term investing. You can rest assured that this effort is only going to get bigger and better in the times to come
It is perhaps this approach that has led lakhs of readers to warm up to us and our ideas. For they know what they will get here is 100% unadulterated and unbiased recommendation. We will of course make our fair share of errors but what we are aiming for is that our good calls outnumber our bad ones by a huge margin.
We are proud to say that so far, that's precisely been the case. In our various services, we have a track record of being right anywhere between 70% to 80% of the times. And please bear in mind that we are talking pretty long term here. In fact we recently completed 10 glorious years of one of our services where our track record stands at a very impressive 80%. In other words, for every 10 recommendations that we have given, 8 have gone on to hit their target within the stipulated time period. Impressive indeed whichever way you look at it!
The twin magic of an independent thought process and our strict adherence to value investing principles was evident in the way we side stepped one of the biggest fiascos in the history of Indian capital market. We are referring to the famous, or rather infamous, IPO of Reliance Power. The issue was quite audacious we should say, with the company seeking to raise in excess of Rs 100 bn, making it one of the biggest IPOs to hit the Indian market. And investors were seen falling over each other in order to subscribe to the issue. Their excitement was fuelled not only by the record highs on the Sensex, but by investment bankers and analysts who literally went berserk in explaining the merits of the issue. All this for a company that had not earned even a rupee in revenue at the time of going for the IPO.
|Stock||Date of Recommendation||Returns till date*||Publication|
|Page Industries||15th Jan 2009||4,926%||Hidden Treasure|
|e-Clerx Services||14th Mar 2009||2,329%||Hidden Treasure|
|Balkrishna Industries||15th Oct 2009||842%||Hidden Treasure|
|NIIT Tech||15th Oct 2008||436%||Hidden Treasure|
|City Union Bank||15th Jan 2010||339%||Hidden Treasure|
|Rallis||4th Jan 2010||308%||ValuePro|
|HDFC Bank||2nd Jan 2012||154%||ValuePro|
|Kitex Garments||29th Sep 2014||118%||The India Letter|
|Glenmark Pharma||18th Apr 2013||109%||StockSelect|
|Swelect Energy Systems||21st Apr 2014||92%||Microcap Millionaires|
*Returns calculated upto July 7, 2015. Past performance does not guarantee future results.
However, our objective assessment had an entirely different story to tell. It told us that the company was on shaky grounds. Not only was there no underlying business to figure out the valuations but the issue too was excessively priced we felt. Therefore, rather than go with the herd, we preferred to go by the numbers and we recommended our subscribers against investing in the issue.
We were perhaps the only major research outfit to do so.
To cut a long story short, the IPO turned into a colossal failure and precious savings of thousands of small investors got eroded.
For us though, it was nothing short of a ringing endorsement of our philosophy and our research process. It clearly showed how a customer-oriented approach rather than commission -oriented could work wonders in the industry.
Of course, this is not to say that this is the only bubble whose eventual deflation we correctly predicted. There have been numerous other occasions where we've gone against the crowd. And in the process, helped our subscribers generate handsome returns or prevent them from losing huge sums of money.
The recommendation on Tata Motors at the depth of the crisis was another such decision we believe.
It was a time when no one was willing to touch the stock even with a 6 ft pole.
However, we felt that factors affecting the company were more short term in nature and given the competitive strength of the company and its staying power, it could reward patient shareholders. Our judgement eventually proved to be correct with the stock making huge gains over the next couple of years.
Similarly, we have also recommended many mid and small cap stocks over the years that have greatly benefited our subscribers.
Having said that, we firmly believe that investing is a marathon and not a sprint. In other words, we have no place for tricks or methods that encourage short term thinking and promise investors to give multi-fold returns in a very short period of time.
We are all about sensible long term investing. And given that businesses evolve over time and take years to prove themselves, how can it be any different we believe. Therefore investors looking to invest in our recommendations from the point of view of making a quick buck or identifying the next big fad in town will be left hugely disappointed in us.
For long term value investors though, we are pretty confident of being the topmost resource and the go-to website when it comes to gaining insight on value investing and building a market beating portfolio.