Table of Contents
- Core basis of the strategy
- Why don't many market participants do this?
- What to keep in mind
- Why not try this with small caps?
- Underrated benefit of this strategy
In my college days I had read the book "The Intelligent Investor" and while the most important thing I learned from that book was the mindset required to do investing, I am sharing an overlooked actionable strategy which is beneficial for someone who is just getting started and wants to get their feet wet.
It's a strategy that fits perfectly with another full time job.
Core basis of the strategy
The market has a tendency to overvalue stocks which have shown high recent growth and UNDERVALUE companies that are OUT OF FAVOUR. This creates the necessary margin of safety in the investment.
Why don't many market participants do this?
One important question to ask yourself is "Why am I the beneficiary of such a great deal?". If the deal was so good, why isn't everyone jumping at the opportunity? You see, whenever a large cap becomes unpopular, there is usually a well-known reason why. It's your job to know that reason. The risk in this strategy is that there's a fairly high chance that the market won't deliver the return in the timeline one would expect even though it will deliver it eventually.
Majority of people would avoid looking like a fool in the short run even if they have a shot at looking like a genius in the long run.
As long as you aren't one of them, then that's your edge. This competitive advantage is a structural competitive advantage. I can share all my secrets, and yet most won't be able to copy it. This strategy was shared in The Intelligent Investor and yet the market isn't efficient enough to eradicate the excess risk-adjusted return.
If you look carefully at some of the biggest institutional investors like Mutual Funds (MFs), Portfolio Management Services (PMS), Alternative Investment Funds (AIFs), a significant majority of them are worried about their next quarter's and next year returns. The investors in these funds judge these funds based on such timelines. If that fund only makes 5% when the index made 12%, then investors in those funds are likely to switch. This starts affecting people's bonuses, promotions, etc. Usually such funds have separate Sales teams and investment teams so there's a high chance of internal blame games occurring.
Individual investors can avoid this institutional imperative as long as they are willing to look like they are underperforming in the short run. Individual investors can also have far more patient long term capital than many funds.
What to keep in mind
- Choose companies with >15% Return on Equity and more than 8% YoY profit growth in the last 10 years. I expect to be paid to wait
- Large stable franchise with good brand recall
- Management team who has proven their operating capabilities
- Only pick from Nifty 50 and Nifty Next 50
- There aren't a lot of such opportunities, thus bet heavy
- No erosion in the company's competitive advantage in the next 5 years
Why not try this with small caps?
- Large caps in general have more prominent competitive advantages over small caps
- Large caps are large because they fulfil a more important societal need than small caps
- Large caps have an extremely low chance a definite loss of profitability; small caps go out of business more frequently
- Large caps are well tracked and on showing better earnings, they bounce back faster; people stop tracking small caps once they have underperformed for a significant while
Underrated benefit of this strategy
I had just finished engineering and was doing engineering as a full time job as well. I have always wanted to learn about business from the best. Large caps are the companies that have "made it". I got to read their concall transcripts, understand their approach to deal with new opportunities and problems. I would say this is a significantly better alternative to an MBA.
This is also a strategy that works with the smallest capital and with large amounts of capital.
I out-performed the index in the past 5 years with this strategy, but the most important thing I learned was how to take price hikes without affecting volume growth only because I was into large caps (thank you Marico specifically). Now that's a skill that will prove to be far far more important in my life than any money I have made till date.
PS: I am now buying some large private banks and NBFCs as a part of this strategy.
