Real Examples of Proxy Investing Success

In the world of investing, there's an old saying - 'Never invest in a war. Invest in companies that sell the bullets.'

At first glance, it might sound like just a clever phrase, but dig a little deeper, and you'll see it's a golden nugget of investing wisdom.

Take India's recent defence sector boom as an example. The headlines often shout about the big defense contractors, the "frontline players".

But if you look closely, some lesser-known companies-those quietly supplying the essential parts and services-have quietly outperformed. Think of companies like Avantel Ltd, which aren't in the limelight but have outpaced many of the bigger names.

What's the takeaway here?

It's the heart of what I like to call proxy investing. Instead of betting directly on the unpredictable outcomes of the star players, why not back the businesses that support the entire ecosystem?

They're like the pick-and-shovel sellers in a gold rush, always profiting no matter who strikes gold.

Heads I Win; Tails I Don't Lose Much

Think about it. When you invest directly in the "war"-the main battle, the big marquee company-you're essentially betting everything on that one outcome.

If the company does well, great! But even a tiny jolt-a competitor emerging, a product flop, or regulatory change-can get the stock hammered. The hype is often baked into the price - the expectations are lofty, leaving little room for error.

Now let's take a different approach. Rather than betting on that one core player, you explore the whole ecosystem and identify the companies that provide the critical tools, parts or services that everyone in that space needs.

These are the proxy players that benefit regardless of who wins or loses in the core battle, because the demand for their products or services grows as the entire sector grows. It's a much safer way to ride the wave of growth with less risk of being caught off guard by a misstep.

Auto Industry Today: A Perfect Proxy Investing Playground

The auto sector has been buzzing for some years now with a wave of premiumization. OEMs-original equipment manufacturers-are launching sleek, feature-packed models faster than ever, blending engineering brilliance with aesthetics and flair.

You'd think companies like Bajaj Auto, Eicher Motors (the Royal Enfield folks), or Ola would be the primary wealth creators here, right?

Surprisingly, no. The real wealth has often been created by companies like Fiem Industries, which supply the parts that make these vehicles stand out-LED lights, rearview mirrors, and other components that add that premium touch.

If you had invested Rs 100 in Fiem Industries a few years ago, compared to Rs 100 in the big auto OEMs, you'd see a striking difference. The proxy player not only rode the growth wave but often outperformed the more obvious choices.

Why do Proxy Plays Often Outperform the Big Guns?

There are a couple of reasons.

The core players often trade at prices reflecting peak expectations. A stumble, or a competitor gaining ground, can lead to sharp corrections.

On the other hand, proxy players often fly under the radar of big institutional investors, especially in the early days.

This gives retail investors a unique window to benefit from two factors simultaneously - earnings growth as the trend unfolds and a potential rerating where the market starts to recognise their value and bids up the stock price.

Second, proxy players supply multiple core players or serve entire industries. Their fortunes aren't tied to a single company's success or failure but to the growth of the whole ecosystem. So, if one core player slows down, they still have others fuelling demand.

Real Examples of Proxy Investing Success

Here are examples where proxy investing has paid off:

• Fiem Industries (auto parts) versus Bajaj Auto
• Accelya Solutions India (aviation software and services) versus Jet Airways
• PG Electroplast (Electronics Manufacturing Services ) versus Voltas

In each case, the proxy player delivered better returns over 5 years, quietly benefiting from the broader industry trend without the rollercoaster volatility of the core player.

The world of investing is full of stories like these-stories of companies quietly powering the big trends and reaping outsized rewards. The trick is to find these proxy plays before the crowd catches on.

So, this is where I am focused. I want to draw your attention to those under the radar proxy plays. I'm looking for companies that are not just riding the wave of growth but are poised to benefit from the market finally recognising their worth.

It's all about positioning yourself where the real growth is quietly happening - discovering the bullet sellers as others fight the wars.

Happy investing.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)