Friday, June 19, 2009

Beating the Market – Opinion

Stock Market is a ground where players play all kind of “speculative” games to win, though they do not necessarily know who they are fighting with. Most of the retail investors try to get ahead comparing themselves with other investors and mutual fund managers who in turn compete with “Mr. Market” to enhance their reputation and performance. But they fail to understand that the fund managers and key investors have far more information, time and money to beat the market and even then vast majority of them fail to do it consistently.

Legendary investors like Buffet and Lynch did it in the past and are still doing it. But people like them are very few and the unique style they follow has not been mastered by anyone else. It’s true that they are giving tips like “Buy Low, Sell High”, “Long Term Investment”, and “Balance Sheet Analysis” etc…But what exact analysis they do before selecting a particular stock is unknown and even Buffet has admitted his failure in couple of dealings last year. So, beating the market is an arduous task and personally I would not waste my energy to match the market and few other people who are less than 0.001% of investor population.

All I would be interested in doing is to analyze the key parameters and business potential of various companies as good as I can and buy stocks that would not make me cry down the road. Of course I will be happy if my portfolio beats the market and I will take it, day or night. But taking undue risk, spending too much time brooding over how my neighbor could make more money than me or trying to become a millionaire in 2 years by investing in the so called “multi-baggers” will all be efforts in vain more often than not.

Strategy to Keep Yourself Happy

Satisfaction is an individual thing and for many people, no matter, how much return they get, still they will be found wanting. It’s natural of human beings to behave in such a manner but we have to learn quickly enough to understand that there is a cost involved in putting undue pressure on ourselves, which we do not count. Making money, getting good returns and beating the market are all desirable things but we should not lose our peace in doing that.

How many people did not curse themselves that they did not invest when the SENSEX was around 8000? If I conduct a poll (I am sure one is on the way), I am sure there will be only one answer. So, the main thing for us is to find the “Satisfaction Point” in terms of investment returns and here is my “Satisfaction Point”.

My Satisfaction Point

I get satisfied when I do the following no matter how much return I get. But believe me; I am close enough to most of the fund managers and even the market. I do not spend lot of time in searching stocks and thinking about it and I follow fairly simple approach.

I invest only when stock markets decline significantly and other people start selling.

I buy stocks that show continuously growing “Quarter to Quarter” earnings with less than the market PE.

If markets go down continuously, then I continue to average till I exhaust 60 % of my intended investment.

If the market plummets like the one we saw in March 09, then I buy for at least 30% of my intended investment.

My intended investment amount in fact rises when the stock markets reach unbelievable lows.

I look for companies that do not show any prospects for failure and businesses that can be sustained over a period of time.

I look for companies that do not have many straight competitors.

Finally I just keep watching my returns when the stock markets go up. My overall portfolio has given the return of about 30% (Started investing when the SENSEX was around 17000 last year) and I do think that’s not bad. But my new portfolio which I started investing when the SENSEX were around 8000 - 10000, has given me 60 % return which is not bad either and I am not far away from the market performance. Markets have gained 45% from 10000 levels and 80% from 8000 levels. If we calculate exactly with my investment period, market return would be somewhere around 60% to 65 % and I am quite close to it. I have not lost a night’s sleep for all this and still could come close to it by doing what I said above. Though my return is in lakhs and not in crores, I definitely think that it can be achieved with the same approach, but with increased risk taking ability and guts. If you can do it with lakhs, I do not see any reason why you can’t do it with crores.

Some people can argue that if I have invested in selective stocks I could have earned in multiples which I agree. Even I bought “YES BANK” for Rs.42 and now it is traded for Rs.133 with an increase of 216 %. But my portfolio contains other stocks too which did not appreciate as much as stocks like Yes Bank. For example, I bought Asian Paints for Rs. 750 and now it is Rs. 1100, an increase of only 46%. Of course there are so many ifs and buts that could have made a difference. If I had bought HDIL when it was Rs. 62, I could have made 500 % return, but I did not want to invest heavily in the real estate sector. Likewise, there are so many examples. Aban Offshore was available for Rs. 220 and it went up to Rs.1100, an increase of 500%. But you can’t rely on just one stock if you are a serious investor and that’s the reason my portfolio return is 60 % which is in line with the market performance. That’s a good enough return for me for the time I spent and I can definitely say that’s my satisfaction point.

Conclusion: Make sure you do all the right and simple things in making a buy decision and continue with your defined approach. Do not get worried about the portfolio performance by comparing yourself with other investors or fund managers. If you buy when others are selling and remain cautious when the market bounces back, then you have a fair chance of getting a market return if not beating it. Even if your portfolio gives 40% overall return and it is 15 % lesser than market return, there is no need to lose your sleep over it as your portfolio still returned decent profit which is higher than what you could have earned in other form of investments. So, the point I am making is, whatever return we get after making a decent effort should satisfy us and I refer it as the “satisfaction point”.

Kumaran Seenivasan


RK June 20, 2009 at 3:07 PM  

Really a "Satisfying" article sir.

Anonymous,  June 21, 2009 at 6:29 AM  

hi good points - but this is not for people who believe in moderation and who have fear.
they must either MF or bank.
Key is not to get carried away and start gambling. - but to analyse invest and draw a satisfaction level as you say!!!

Sunil N. Karande June 22, 2009 at 3:12 AM  

Dear Sir,

Thanks a lot for the nice information...sir can you pls post a topic on
1)why rupee app and depr
2)How to gain a lot from stock future
3)Why dollar appr and dep.

Shabu's June 22, 2009 at 11:38 PM  

Dear Kumaran,

Nice post and agree with your views. Peace of mind is above all which might keep us healthy for longer trading sessions.
But I think, Its always better to have a mood of race or having some healthy competetors in every field which keep us energetic and to be innovative.

Kumaran June 23, 2009 at 6:35 AM  

Hi Shabu,Thanks for your comments. Yes.We need compettitors, but all I am saying is to do it in your own way and if you fall short of achieving it, then do not lose your heart. Many a times, comparison makes people crazy and lose their sight.

Faisal Humayun June 30, 2009 at 7:21 AM  

I think an investor should always track the index return and compare it with his/her returns...

If for 2-3 years or more one is not able to get high returns then the index then its better to invest in the index...there is no use of doing so much of research and selecting stocks...

whats your opinion on this?

Kumaran July 1, 2009 at 7:09 AM  


Thanks for your comments. You made a very valid point and in fact I have been thinking to post on article on Mutual Funds since my last post. There is no point in putting pressure on ourselves. If we are OK with decent returns, Index funds are good. But people do not realise that after spending so much energy and time, they still end up with sub-par returns.Instead those people who does not practice the basics can opt for index funds.....

AK,  July 22, 2009 at 12:30 PM  

Dear Kumaran,
Yor are doing good work. Very informative articles. Infact I read you article about long term investments in march and invested in some of the stocks and made profit as well, however the mistake I did was I sold the stocks early i.e. soon after I saw they gave me some return but I am learning.


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