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Commentary

Permanent loss of Capital

One of the often quoted reason to invest in the stock market is that they have delivered XX% returns since 1979. This of course is bullshit given the fact that Sensex did not even exist in 1979, let alone a retail investor have the avenue to invest in its constituents.

And then there is the tales of how investing just 10K in 19xx would have turned into Crores of Rupees today. Just today, on Whatsapp I received the following message

Motherson Sumi announces :- 1:2 Bonus on 10th June’15
See Wealth Creation of Motherson Sumi :-
Motherson came out with IPO at 25 INR per share in April-1993
Only 2500 INR of investment on 100 shares.

The Company’s Bonus History and Multiplication of Shares as follows :-

1997-98: Bonus 1:2 – 100 shares became 150 shares
2000-01: Bonus 1:2 – 150 shares became 225 shares
2002-03: Split into Rs.5 paid up – 225 shares became 450 shares
2003-04: Split into Rs.1 paid up – 450 shares became 2250 shares
2004-05: Bonus 1:2 – 2250 shares became 3375 shares
2007-08: Bonus 1:2 – 3375 shares became 5062 shares
2012-13: Bonus 1:2 – 5062 shares became 7593 shares
2013-14: Bonus 1:2 – 7593 shares became 11389 shares

So, 100 shares became 11,389 shares.

Current market value of 11,389 shares=
11,389 shares*Rs.489(Current Value)=55,69,221 INR

So, Total Value of Rs.2500 invested in IPO including cumulative dividend is Rs. 56,71,602 as at 10th June, 2015.

Thus, 2268 times increase in Investment Value in 22 years!!!

Patience is bitter, but its fruit is sweet

The compounding is really amazing but what the message does not say is that this is Selection Bias at best. While Motherson Sumi survived and thrived, there are thousands of IPO’s which came in the same era and which are not even listed on date.

If you had invested 10,000 Rupees (which in 1993 represented maybe a couple of months salary for any mid level employee) into every IPO that came out in 1993, I can assure you that your returns today, adjusted for inflation would be measly at best and disastrous at worst.

That does not mean, no one has invested and held on to great shares. There would be quite a few such folks who would be sitting on tremendous returns realized from those investments. But the reason for them to hold would be far away from any fundamental or technical arena.

These days, I find many a folk advising one to invest directly in the markets despite the fact that the probability of a investor really outperforming the market on a long time frame is in the low single digits. We are told to invest in blue-chips, but how many blue-chips remain blue-chips over a period of time?

Yesterday,  I finished reading a book written in the aftermath of the 2000 bubble. Its amazing how easy it was then (as it seems to be even now) to manipulate the small investor / trader to buy stocks that are touted as the next big thing.

While 2000 was purely a Infotech led bubble, the 2008 bubble was much broader and hence I wondered as to how many stocks have survived over the last 7 and a half years and what has been the return between then and now.

The results as shown in the tables below is literally devastating. Many of the stocks which traded in the high 100’s and even above 1000 are now more or less trading or were de-listed at pennies.

Take for example a stock like Koutons Retail. The stock which came out with its Indial Public Offering in September 2007 was over subscribed by 45 times when it offered its shares for sale at 415 Rupees (Link).

With markets in full flow, almost all major brokerage houses / newspaper recommended investing in the same.

Koutons Retail: Invest (BusinessLine Review)

An investment with a one-year perspective can be considered in the initial public offer (IPO) of Koutons Retail India (KRIL). KRIL is a player in the menswear segment with a network of stores mainly in northern and western India. The offer proceeds will help the company expand its retail network.

The price band of Rs 370-Rs 415 values the company at 33-36 times its 2006-07 earnings per share, on an expanded equity base.

KRIL’s premium pricing appears to factor in higher growth rates compared to domestic apparel majors such as Raymond, Zodiac Clothing and Kewal Kiran Clothing. The latter trade at price-earnings multiples of 15-20 based on trailing earnings.

However, KRIL’s performance over the last couple of years and its proposed expansion plans provide some justification for the higher growth expectation.

The expensive valuation for the offer, however, does not provide a margin of safety in the event of disappointing performance. This makes it suitable only for investors with a high risk appetite.

While the huge over subscription would have meant limited allocation, investors who did get a small piece of the cake were left happy with the stock moving higher. In fact, so good seemed this stock that even as rest of the markets were getting slapped in early 2008, Koutons made a new high in late February (by which time, Nifty was down 17% from its peak).

The slide started from then as markets tumbled even further and even Koutons caught onto the fever. But Brokerage houses were not one to be moved by this volatility as they continued to recommend the stock even as it went down the rabbit hole.

Some of the few brokerage reports I could find can be downloaded here (Koutons Research Reports). Since their publication, the stock had gone just one way – down the rabbit hole so as to say, but while I could  find Buy Reports, I found Zero sell reports. The reports though seem to completely stop in 2011 with the stock having breached the 100 mark as well.

Yesterday, I tweeted the complete list of winners and losers. For those interested, here is the spreadsheet with the same data for you to check any company you would like to. (Link) Do note, that most of these prices are adjusted for Splits / Bonus and hence the actual closing prices may have been different for a few stocks. Add to that, some stocks which got delisted / merged and where the earlier ticker bore no resemblance may pop up, apologies for that.

Also, this list is only of those stocks that are listed on NSE. (Link).

To summarize, Direct Investing while seeming to be way more attractive than investing via a Mutual fund can be very expensive in terms of your ability to meet your goals as also enable your savings to grow if you are not able to choose the right stocks. But what are the right stocks becomes the bigger question when stocks supposedly great end up on the mat.

If the mutual fund universe were to be scanned using a database of Survivorbias free returns, I believe you shall find that even there, many investments would have given partly gains. But the key difference is that the percentage of such funds are lower than what we can find in stocks. Also most funds which tripped where sector focused funds which anyway’s carry a much larger risk than a diversified fund.

Direct investing is very risky unless you are prepared to do all the hard work required. Direct investing in funds these days costs just around 1.25 – 1.75% and I strongly believe that this is a small price to pay for the ability to at the very least keep up with the market. ETF’s are another route, but unless we have a more broad based ETF markets (Mid Cap / Small Cap / Sectors), it will remain a fringe industry (though one that has proved based on performance to be better than most Mutual Funds in US where there is both depth and variety)

 

Discussion

3 Responses to “Permanent loss of Capital”

  1. Very Neutral Views shared here. Everything here is from vast Experience of writer. Good article. Congratulations…

    Posted by SIRASHA | 18th June 2015, 9:08 pm
  2. Good One Prashant.
    A fairly balanced view

    Posted by Srikanth Shankar Matrubai | 20th June 2015, 5:44 pm

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