This Market-Beating Formula Is as Simple as It Is Profound - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


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

This Market-Beating Formula Is as Simple as It Is Profound
Sep 23, 2016

I love the way Jordan Ellenberg has divided the mathematical universe into four quadrants. His book, How Not to Be Wrong, comes highly recommended by Bill Gates by the way.

Ellenberg's goal is ambitious. He wants to focus on the northwest quadrant where the mathematical principles are profound yet simple. In the rest of the quadrants, the principles are either simple and shallow, profound and complicated, or both shallow and complicated.

The Market Beating Chart

I don't know if he will succeed, but he's certainly got the diagnosis bang on. No matter the discipline, people should hang out in the northwest quadrant more often. As the title of the book suggests, it would help them not be wrong.

Let's turn our attention to investing.

Which investment principles do you think fit into the northwest quadrant?

Think Warren Buffett. No one has mastered the art of making profound investment principles look simple better than he. Peter Lynch is a strong contender for second place.

Jargon and complex investing terminologies have no place in their writings. No wonder they're two of the most popular investment writers.

Now let's connect the dots. Random insights from Buffet and Lynch are great, but we need a coherent investment strategy. An investor will have to sift through a lot of material to arrive at a strong, consistent investment strategy.

But that's why we rate an investing rulebook from Benjamin Graham pretty highly. We came across it about three years back and were struck by its simplicity and profundity.

What's more, it presented a coherent investment strategy that investors can implement right away.

As per Graham, an investor needs to keep in mind only three rules to create a diversified market- beating portfolio:

  • Buy stocks based on certain objective parameters such as its current earnings or book value and don't worry at all about future book value or earnings. The company must have a strong balance sheet.
  • Sell stocks as soon as they go up between 50-100% or in two years, whichever is earlier.
  • Keep a minimum of 25% of the portfolio in both stocks and bonds at all times. When markets are expensive, go as low as 25% in stocks and as high as 75% in bonds. When markets are cheap, do the opposite.

You'd be hard-pressed to come up with a formula that's as simple and effective as this.

And Microcap Millionaires has demonstrated the formula's effectiveness. We launched the service based on these three rules, and it's currently outperforming the benchmark index by a big margin. Returns currently stand at 105% as opposed to the Sensex's 39%.

Simple yet profound - that's how you operate in the northwest quadrant.

We recently published a Microcap Millionaires special report with full details on our Top 6 Microcaps for 2016. Yes, six microcaps that meet Ben Graham's stringent investing criteria. If you haven't tried Microcap Millionaires yet, click here for a personal invitation.

Investing in the Right IPOs

Speaking of simplicity, we just made choosing the right IPO stock simpler for you.

While our general pessimism towards IPOs is well known, we do think a select few IPOs are fundamentally strong and leave some money on the table for investors.

Do check out our special report, The Handbook of IPO investing.

Besides providing a checklist to help you identify the right IPOs, it has a special focus on insurance stocks and how to value them.

Vivek's Brand New Video

As you know, Vivek Kaul recently launched The Vivek Kaul Letter - the first newsletter of its kind in an Indian context. It is an effort that will help you stay on top of big macro trends in India. The ones that could directly impact you and your family. Vivek will be addressing a range of big issues - the government's handling of oil prices, the mess in public sector banks, the state of India's real estate bubble...and a lot more!

In fact, as you read this, Vivek has just come out with a video that details all...including how these trends could impact you.

Click here to know more.

Accuracy Rate and Risk-Reward Ratio: A Winning Combination

Most people think you need high accuracy rate to be profitable in trading. But this isn't true at all. You can make money with a low accuracy rate provided you have a good risk-reward ratio. Risk-reward ratio refers to how many rupees your winning trade will earn for every rupee you risk. Unfortunately, risk-reward ratio gets little attention from retail traders. Apurva Sheth, editor at Daily Profit Hunter, covers how to combine risk-reward ratio with accuracy rates to build an effective trading strategy.

Click here for more...

To Read the Full Story, Subscribe or Sign In

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get our special report, Secret to Increasing Your Trading Profits Today Now!
We will never sell or rent your email id.
Please read our Terms