Invest Without Emotions
Credit Suisse came out with a research report yesterday that picked 10 mid-cap stocks that looked good. Can these stocks out-perform the Nifty? How would an equally weighted portfolio of these stocks perform over a period of time? Is the hit ratio any better than 50/50? Well, we created a Theme that tracks this portfolio. So dood-ka-dood, pani-ka-pani.
Check out the Theme here: “CS Midcap 28-Aug-2013”
[stockquote]PRECOT[/stockquote]
We had filtered stocks based to Gross Profitability to Total Assets (GPA) and Book Value to Market Cap (BtM). If you combine the two, you get the Quality to Price ranking. The goal is to end up with stocks that are profitable and under-priced.
We went one step further and setup a Theme that invests in NSE stocks that fit this criteria. Check out the “Quality to Price” theme – a portfolio of 10, equally weighted stocks for the value investor in you.
[stockquote]PRECOT[/stockquote]
Book Value to Market Value (BtM) is the ratio of the firm’s Book Value to the Market Price of Equity. Book Value is simply total assets minus intangibles and good will and Market Price is the total common shares outstanding times the market price of the stock.
The problem with the BtM ratio is that it tends to pick stocks that are under attack. However, its an useful measure to make an apple-to-apple comparison between stocks within the same sector.
When we ranked the universe of stocks using BtM, it obviously threw up a lot of stocks that have been hammered down:
SELMCL [stockquote]SELMCL[/stockquote]
MICROTECH [stockquote]MICROTECH[/stockquote]
GAMMONIND [stockquote]GAMMONIND[/stockquote]
UNITEDBNK [stockquote]UNITEDBNK[/stockquote]
UBHOLDINGS [stockquote]UBHOLDINGS[/stockquote]
What’s more interesting is what made the bottom of the list:
DABUR [stockquote]DABUR[/stockquote]
ZYDUSWELL [stockquote]ZYDUSWELL[/stockquote]
BAJAJCORP [stockquote]BAJAJCORP[/stockquote]
TCS [stockquote]TCS[/stockquote]
EMAMILTD [stockquote]EMAMILTD[/stockquote]
HINDUNILVR [stockquote]HINDUNILVR[/stockquote]
GODREJCP [stockquote]GODREJCP[/stockquote]
PAGEIND [stockquote]PAGEIND[/stockquote]
COLPAL [stockquote]COLPAL[/stockquote]
SPARC [stockquote]SPARC[/stockquote]
So basically, the more ‘popular’ the stock, the less of a ‘value’ it is, at least according to BtM. Also, when you work with annual balance sheets later in the year, most of the information tends to be fully priced-in.
Gross Profitability to Total Assets (GPA) is the ratio of the firm’s gross profits (revenues minus cost of goods sold) to its assets. Gross profitability has been shown to have far more power than earnings in predicting returns. Gross profits is the cleanest accounting measure of true economic profitability. The farther down the income statement one goes, the more polluted profitability measures become, and the less related they are to true economic profitability. Investors who are interested in the literature can read The Other Side of Value: The Gross Profitability Premium by Robert Novy-Marx (pdf)
For the companies for which we have 5 years worth of financials available, 20 stocks with the best GPA score are:
RSSOFTWARE [stockquote]RSSOFTWARE[/stockquote]
GEOMETRIC [stockquote]GEOMETRIC[/stockquote]
COLPAL [stockquote]COLPAL[/stockquote]
ZENSARTECH [stockquote]ZENSARTECH[/stockquote]
TATAELXSI [stockquote]TATAELXSI[/stockquote]
NIITTECH [stockquote]NIITTECH[/stockquote]
THINKSOFT [stockquote]THINKSOFT[/stockquote]
INFINITE [stockquote]INFINITE[/stockquote]
ECLERX [stockquote]ECLERX[/stockquote]
ALLSEC [stockquote]ALLSEC[/stockquote]
HINDUNILVR [stockquote]HINDUNILVR[/stockquote]
BRITANNIA [stockquote]BRITANNIA[/stockquote]
INFOTECENT [stockquote]INFOTECENT[/stockquote]
ZYDUSWELL [stockquote]ZYDUSWELL[/stockquote]
PERSISTENT [stockquote]PERSISTENT[/stockquote]
TCS [stockquote]TCS[/stockquote]
TTKPRESTIG [stockquote]TTKPRESTIG[/stockquote]
MASTEK [stockquote]MASTEK[/stockquote]
TECHM [stockquote]TECHM[/stockquote]
PAGEIND [stockquote]PAGEIND[/stockquote]
The bottom 10 are:
SOUTHBANK [stockquote]SOUTHBANK[/stockquote]
CUB [stockquote]CUB[/stockquote]
DCB [stockquote]DCB[/stockquote]
ESL [stockquote]ESL[/stockquote]
SYNDIBANK [stockquote]SYNDIBANK[/stockquote]
YESBANK [stockquote]YESBANK[/stockquote]
UNIONBANK [stockquote]UNIONBANK[/stockquote]
VIJAYABANK [stockquote]VIJAYABANK[/stockquote]
UNITEDBNK [stockquote]UNITEDBNK[/stockquote]
UCOBANK [stockquote]UCOBANK[/stockquote]
The bottom 10 non-financial stocks:
ESL [stockquote]ESL[/stockquote]
IBPOW [stockquote]IBPOW[/stockquote]
SUNTECK [stockquote]SUNTECK[/stockquote]
RPOWER [stockquote]RPOWER[/stockquote]
SREINFRA [stockquote]SREINFRA[/stockquote]
GREENPOWER [stockquote]GREENPOWER[/stockquote]
UNITECH [stockquote]UNITECH[/stockquote]
MANJEERA [stockquote]MANJEERA[/stockquote]
GAMMNINFRA [stockquote]GAMMNINFRA[/stockquote]
MURLIIND [stockquote]MURLIIND[/stockquote]
GPA favors ‘asset light’ companies over infrastructure and capital intensive ones. For example, banks with a retail presence will obviously under-perform software services companies. But its a useful measure to discern between stocks within the same sector.
Now here’s a book that really is about you, just as it claims. It’s a rare treat among the seriously brain freezing literature available on investment, all extremely knowledgeable I’m sure but dreadfully painful to read. “The Little Book of Behavioral Investing: How not to be your worst enemy” by James Montier grabs you from the very start because: (a) the author’s style is beguiling and amusing, (b) through the subtle humor, you get the message in all its clarity, (c) it’s extremely relatable. Many of the behavioral streaks mentioned in the book will resonate with readers, from the worst investor to the best. And even the best become their worst enemy at times, says Montier.
In the book’s introduction, Montier mentions a startling fact. According to the annual Dalbar studies, the S&P 500 has generated just over 8 percent on average each year, over the last 20 years. So perhaps individual equity investors can be tagged at 6 to 7 percent, yes? Wrong. Equity fund investors actually earn a paltry 1.9 percent per annum, primarily because of selling and buying at the worst possible times.
In his book, Montier discusses the human traits that make us take illogical and potentially expensive decisions. Thankfully, he also offers solutions to these challenges, most of which are fairly easy to practice, with some discipline. Through the book, Montier shares experiences of leading investors across the world. Like us, they too have succumbed to mental pitfalls at some time. It’s heartening to know, isn’t it? Montier hopes this book will make each of us look inwards, at our own human biases.
To our credit, it’s not really our fault. We can blame it all on evolution. Montier believes we’re still wired to fit into a world that existed 150,000 years ago. Our brains haven’t kept up with the change in our circumstances. Therefore, till we invent technology that brings our brains up to speed, you need this book.
Montier also makes an interesting analogy of our human biases with Star Trek’s Spock, logician and emotionally unsusceptible (but even he got confused at times) and McCoy, the ever emotional comrade. Our brain too has an X-system that aims to satisfy and please quickly, often drawing a picture based on our wishes rather than reality; and a C-system that’s driven by logic. It’s slower in drawing conclusions and as luck would have it, is harder to engage. Additionally, the X-system evolved before the C-system which explains why we are all driven by emotion. If you think you’re a Spock, get the book and get on with the CRT test. Tell me how it goes.
Cultivating our C-system takes perseverance, constant practice and time. It can also be mentally exhausting. Again, Montier has a solution. Now, it may be over-optimistic to believe that each of us will rise to John Templeton levels by the end of this book, but if it doesn’t make you rethink your investment strategies, well, I’ll eat my hat!
(PS: I live in India. I don’t wear a hat.)
Monica Samuel is doing a chapter-wise review of the book: The Little Book of Behavioral Investing: How not to be your worst enemy by James Montier. You can follow the series by following this tag: tlbbinvesting or by subscribing to this rss feed: tlbbifeed
