Recently one of my friends asked
me to suggest a multi-bagger stock and I asked him to elaborate his
requirement. Then he said that he could invest a large sum now and forget it
for a long time and it should translate to a multi-fold return. Then I mentioned
stocks like Wipro & Infosys that if one had invested couple of decades back
could’ve made returns in exponential times, for which he inquired if there’re
stocks like Eicher Motors & Bosch which have multiplied in less than 5years
time. I gave up reasoning.
First one needs to understand
that one can’t always end up getting a stock which is a phenomenal winner.
While those who invested in the above stocks didn’t restrict their entire money
into that. It was an allocation that went right while may be there’re many
misses also. So, when someone thinks to strike gold by identifying one
particular stock then probability of the success is nothing but chance.
Over the past 100 years, only one
company featured in the Dow 30, the Dow Jones Industrial Average (DJIA) consistently
and its General Electric. And nearer home, NIFTY, the 50-stock index had a
churn of over 150 stocks in about two decades. That’s how competitive the
businesses are and merciless the expectations are. So, to just identify one
stock and invest all only into is not a great move for any investor. The Dow’s
average age of its constituents is 111 years while that of the Nifty is a mere
46 years while the oldest company is about 121 years old (PNB) that of DJIA is
DuPont at 214 years. Another stark point is the youngest companies of these
indices is about 10 years for Nifty and over 30 years for DJIA.
The last statistic provides for a
critical inference that the competition is heating up and the average age of
the businesses is shrinking and also their time to succeed. We’re witnessing
and living in the world where the trend of Unicorns (valuation of $1bn and
more) and their rise within a short span of less than 5 years. So, with this
backdrop, how could one make greater returns from stocks?
It might interest to bring an
analogy of cricket (with the IPL fever alive) to understand the investment.
When we watch some fabulous individual contributions by a player while over the
same pitch at the same ground on the same day with the same opponent, their team
members fail to capitalize, we wonder how this player had succeeded. We credit
him with his technique, style and sense of responsibility but if these are so
easily identified and measured then why couldn’t other emulate. There’re times
the spectators, critics and the commentators would simply define this by using
adjectives like talented or gifted. But, one common feature of that performance
would be of little or no mistakes.
How to read that in the
investment context? It means that the most rudimentary part of investment is
about not making mistakes or avoiding them. This is critical than making the
best of the investment decisions. This is what happens when investors are
obsessed to find the top-performers in stocks or mutual funds. This leads the investor
shuffle between the stocks/funds and not spend the required time to realize the
benefits. It needs to be accepted that unless one is a genius or chance lucky,
that always does end up with such multi baggers.
How to avoid the losers even if
not making stellar returns? This is possible only by working with a stiff
timelines and/or performance range. Simply put, one has to either have a
targeted returns or time while investing in a stock. At each point when the
stock hits the targeted level, needs to reassess to the holding limit (i.e. to
add or shave off) and derive a newer target. In case of a MF, one has to make
investments in a systematic or staggered manner with top-ups at any attractive
levels while profit booking at advantageous times. This way one could not only
make returns but also increase the investment pie.
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