The Key to Earning 176% in 6 Months. Don't be a 'Prediction-Jeevi'

Feb 25, 2021

Rahul Shah, Editor, Profit Hunter

I am sure you would have guessed the inspiration behind today's title.

It's a take on Andolan Jeevi, the term coined by Prime Minister Narendra Modi to describe people for whom protesting has become a hobby.

Well, the stock market has its own version of such 'jeevis' who believe in making pin-point predictions all the time.

Prediction Jeevis if you will.

What's more, they even go ahead and bet the farm on it. Thus, they expose themselves to a guaranteed destruction of wealth should their predictions fail to materialise.

One such group of prediction Jeevis in the US market was Long Term Capital Management (LTCM).

It had people with impeccable credentials in it. There were finance veterans, PhDs, and even two Nobel Prize winners on it.

It was hard to believe this group could fail at anything much less a financial venture.

But this is precisely what happened.

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A hedge fund started by these prediction Jeevis not only failed but came very close to sending the entire financial system into disarray.

Due to huge losses on its investments, the fund had to be bailed out by the Federal Reserve and was eventually shut down.

I wish they could have heeded Ben Graham's advice or even Warren Buffett for that matter.

Ben Graham once joked that the last time he made any prediction was in 1914. That was when his firm judged him qualified to write their daily market letter based on the fact that he had one month's experience.

Since then he had given up making predictions.

His most famous pupil, Warren Buffett, is equally sceptical of anyone's ability of making correct market predictions.

'Predicting rains doesn't count, building arks does', is one of the dictums he swears by.

A question that baffles most investors is the difficulty in making stock market predictions.

Why is that when we have landed people on the moon and cracked a lot of other mysteries in our universe, we can't get a grip on something as simple as investing in the stock market.

Well, the answer lies in Sir Isaac Newton's confession after he lost a tidy sum speculating in the financial market.

'I can calculate the motion of heavenly bodies, but not the madness of people', he is believed to have said.

I couldn't have said it better.

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A lot of prediction in investing depends upon how the crowds will behave.

But human behaviour is very hard to predict.

The markets can react differently to the same piece of news on a stock. A positive development can take the stock price up. It can also lead the stock price down.

Thus, if you invest in the market full of confidence and in the hope that you've done all the research, the behaviour of the market can throw a nasty surprise.

And I think this is what the prediction Jeevis at Long Term Capital Management realised the hard way. They bet big, hoping that just as in math and science, results in investing are also highly predictable.

However, in finance, no matter how sophisticated your analysis, the results can and do go against you. When they did so for LTCM, the losses incurred were too big to recover from.

Thus, if predictions are so difficult to make and investing is all about taking a call on the future, how should you approach investing?

Is it all random? Should everything be left to chance?

Certainly not.

There is a way out. It can be explained with the help of a wonderful analogy.

We should approach investing the same way a gardener provides an appropriate environment to his plants.

A gardener knows there are things that he can control and there are things he can't.

The soil, the seeds, the sunlight, the water are all something that he can exercise some control over.

We know that if mixed in the right proportion, all of these elements can combine to yield a nice, profitable crop.

Yet, we can't be 100% certain of this outcome every single time. There are things that can go wrong and a lot of times they do.

However, if we do this long enough, there is a strong likelihood of success.

And this is exactly how you should approach investing as well.

When I recommended a penny stock from the construction space back in September 2020, I focused on things that I can control.

Things like ensuring that the stock has good growth prospects, a strong balance sheet and attractive valuations.

And this was indeed the case back then.

The company did not have a single year of negative earnings over the last 12 years.

It had debt that was consistently lower than its equity.

Last but not the least, was available at a whopping 60% discount to its book value.

In other words, a company that had a value of Rs 100 per share was available at just Rs 40. It was priced as if the company was going bankrupt.

This was far from the case. I knew that in a strong bull market, the stock will find a lot of takers.

And this is exactly what happened. As of writing this, the stock is trading well above its book value.

It's up a huge 176% for those who would have acted on my recommendation.

This is not the only winner in my kitty though. I have closed 15 recommendations in a row where the stocks have given strong returns.

I follow an approach of not being a prediction Jeevis but following a sensible plan of doing well on the things that are under our control.

We may face a few failures but if the approach is sound, there will be good returns for the taking over the long term.

Good Investing,

Rahul Shah
Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Today you can get access to Richa Agarwal's best small-cap stock recommendations in the ongoing smallcap revival. Details here.

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1 Responses to "The Key to Earning 176% in 6 Months. Don't be a 'Prediction-Jeevi'"

krishna

Feb 27, 2021

The Returns for most Experts are bound to be GOOD - when the market had a huge fall and it recovered ground in a long term. Most stocks across the board did well.

I agree, Prediction is not trust worthy - selection of good stock is.

I would like to exclude the Last ONE years Return to judge the Performance of a portfolio. In that way - Equity master analysts/ advisors has done a good job even when the market did not do well.
(I should say about 60-56%) of their recommendations have done good. excluding last year ofcourse)

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