In 2020, Give 'Buy & Hold' a Break. Try My Market Beating Strategy Instead

Dec 19, 2019

Rahul Shah, Editor, Profit Hunter

Contrary to popular belief, super successful investors don't have a very high accuracy rate.

Even the greatest investors in the world find it difficult to go past the strike rate of 60%-70%. In other words, even they can't make money on more than 6-7 stocks out of every 10 stocks they buy.

However, what separates them from the lesser mortals is the amount of money they make when they are right...and the money they lose when they are wrong.

The amount of money they make when right far exceeds the money they lose when they are wrong.

A recent Twitter post on Rakesh Jhunjhunwala reinforced this principle yet again.

Quite a few of his bets have turned out to be huge wealth destroyers: Dewan Housing, Jet Airways, Jaiprakash Associates, Reliance Defence, Prakash Industries, IVRCL, Bilcare, A2Z Infra, Viceroy Hotels, McNally Bharat, Provogue, Prime Focus...the list goes on and on.

However, what has done his reputation and his wealth a world of good are three of his key investments viz, Titan Industries, CRISIL, and Lupin.

He has been an investor in these three stocks for more than 17 years. Here's how each of these has performed since then.

  • Titan up more than 600x
  • CRISIL up more than 120x
  • Lupin up more than 81x

These are impressive numbers by any stretch of imagination. What makes them even more impressive is that Sensex, the benchmark index is up a mere 12x in the same period.

An investment in these three stocks in line with investments in other stocks alone would have led to impressive long-term results.

But what made Rakesh Jhunjhunwala laugh his way to the bank were his concentrated bets on all three of these.

These three stocks put together account for nearly 2/3rd of his entire portfolio at current prices. Yes, you read that right. Nearly 66% of his portfolio of more than 12,000 crores is made up of just these three stocks.

I am sure they would have amounted a big chunk of his portfolio at the time he bought them as well.

His modus operandi is thus very clear.

  • Invest in quality stocks at reasonable valuations
  • Take a concentrated bet in them and
  • Hold them for the very long term

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Isn't this straight out of Warren Buffett playbook?

You bet it is. Even the Oracle of Omaha swears by taking concentrated bets on quality stocks and has holding period in terms of decades and not months or years.

To be honest, I can't argue with such an approach on grounds of logic.

I think the approach makes tremendous sense. Plus, it is responsible for the wealth of some of the most successful investors in the world, including these two gentlemen.

However, it is the successful implementation of this approach that I have a bone to pick with.

Although it is easy to say in hindsight, finding the next Titan or next CRISIL or next Lupin out of thousands of listed businesses isn't easy at all.

And even if one finds them, buying them at attractive valuations and then holding on to them for years with all the accompanying volatility, will test the mettle of even the most seasoned investors.

A lot of investors venture out on this journey only to realise later how difficult the terrain is. They will either end up investing in the wrong stock or at the wrong valuations. If at all they manage to get past these hurdles, there's every chance they will get scared from the 40%-50% drop in share price and move out of it.

I am not saying one should totally abandon this approach. One should certainly keep looking for the next Titan or the next CRISIL.

However, you should also have a parallel strategy running. In this strategy, you can invest in small and undervalued companies for a quick 50%-100% gains.

Once you achieve these gains, you you can keep the money rolling into another opportunities to make market beating returns overall.

Mind you, this approach is as logical as finding the next Titan. It is also a lot easier to implement as well. Here, you don't have to peep too much into the future or do an in-depth analysis of the company.

All you need to do is figure out if the stock is trading at a discount to easy to measure parameters like book value or its liquidation value, and then see to it that it does not have a lot of debt on its balance sheet.

Does this strategy work?

I have been using exactly such an approach in Microcap Millionaires. The approach has outperformed the benchmark index, returning 160% since inception in February 2014.

By the way, even Warren Buffett has confessed that if had a much smaller portfolio, he would have preferred using this approach.

Even Rakesh Jhunjhunwala believes in using a parallel strategy like trading which gives him quick returns that he can then deploy in 'buy and hold' stocks like Titan and Lupin for long-term wealth creation.

So, if you are looking for a parallel strategy for generating a quick buck, Microcap Millionaires is certainly worth giving a shot.

It will ensure your wealth keeps growing at a good clip even as you continue with your Buy and Hold strategy and stay invested in those elusive multibagger stocks.

Warm regards,

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

PS: Tomorrow at 5 pm sharp, Equitymaster's co-head of research, Tanushree Banerjee, will reveal the Greatest Money-Making Opportunity of 2020 and beyond! Get the details of this event here.

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