January 2019 Newsletter

<This is an extract from our January 2019 newsletter to clients>

Investor Behavior – We won’t sell at a loss

In the current market conditions, there are times when we must exit positions at a loss. There are periods when we book profits consistently and then there are periods, when we exit many positions at a loss.

When we give exit calls, a few investors do not exit the positions. They exit some, they hold the balance for the cost price to come. This is not the best habit to have as an investor. There are reasons why we exit a position, if we knew that the cost price would eventually come back, we would not exit! We would instead add more and hold.

The problem is that investors do not take a bird eye view when it comes to looking at the portfolio returns. They look at the returns of each stock in the portfolio. We will use the example of Cricket to explain this behavior.

India has posted a strong score of 296 and the run-rate is > 6. It is like a portfolio that has delivered a 15% CAGR over a 5-year period. As a viewer, you will be satisfied with the result. However, if this was your portfolio’s performance then you would not be impressed.

Out of 10 players, just 3 players scored most of the runs. A century, two half centuries and the rest of the players did not even cross 15 runs! Imagine if your portfolio delivered a 15% CAGR and just 3 stocks of out 10 were the reason for the return. Instead of being happy with the returns, you would question why 7 stocks failed to deliver returns.

With any portfolio, like a cricket team’s score card, you will have most of the returns coming from a few stocks. The other stocks would end up in a loss or deliver sub-par returns. You cannot expect most of the stocks to deliver a strong performance. That is why we have different allocations to each stock.

When it comes to stocks, never get emotional.

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How to invest Rs 5000 per month

Invest Every Month The benefits of investing every month in a systematic way are many. It makes you more disciplined, it helps you take advantage of market volatility, it is a lesser burden on the pocket, etc. The most common amount that a middle class person wants to invest now days is Rs 5000 per […]

Cash to Market cap ratio can help spot bargains

Cash to Market Cap – Companies with lots of cash

Cash to Market cap

Cash to Market cap will basically tell us, what % of the current market cap of the company is currently in cash. For example, let’s say company ABC Ltd. trades at a market cap of Rs 5,500 Crores. It has a total debt of Rs 500 Crores and cash & bank balance of Rs 2,000 Crores. This means that the entire business of ABC Ltd. is virtually available at Rs 4,000 Crores!

Many times, the cash to market cap ratio can help investors shortlist stocks that offer a decent Margin of Safety but at the same time, investors have to be skeptical of companies which are over-stating (faking) their cash & bank balances. In this article, we look at a list of companies that have low long term debt, high cash & bank balance therefore translating to a high cash to market cap ratio.

What we will exclude:

i) Banks and NBFC’s

ii) Companies having a market capitalization lower than Rs 500 Crores


i) Market capitalization > Rs 500 Crores

ii) Long term debt to equity < 0.5

iii) Cash and Bank balance > 25% of Market capitalization

PS: We ignore current investments for computation of the cash and bank balance.


Cash to Market Cap


These are the top 9 companies with negligible debt and a high Cash to Market cap ratio.


Does this strategy out / (under) perform the Nifty 50 index can be tracked live here:


What do you think about investing in companies with high cash to market cap ratios? Do comment your views below!

PC Jewellers and More – Our Mistakes

In this article, we share our insights on companies which turned out to be bad investments and also the lessons learnt from these investments.

PC Jeweller

PC Jeweller has seen a massive wipe-out of shareholder wealth over the last few trading sessions. It was one of the biggest gainers for our investors, some of who were seeing a 10X return on their initial investment at Rs 47 to 57. Our new members had PC Jeweller from Rs 250 to Rs 350 post which we had stopped recommendation. PC Jeweller was trading at ~ Rs 600 just a few months back and today it is well below Rs 150 and their seems to be no end to the fall of the stock price.

Fall of Shame

We have exited the stock and the highest allocation to PC Jewellers was just 3%, we trimmed allocation continuously as the stock price started collapsing from its high of ~ Rs 600. Some exited the stock with a profit of 500%, while some exited with a loss of ~ 50%. We controlled the dent it had on our portfolio because we knew the red flags around the company and thus had a low allocation throughout. So what went wrong with PC Jeweller? We don’t know! The management is still on teleivision that all is well. But here is what we communicated with our investors.

i) High receivables: Now, noone buys jewellery on credit. PC Jeweller has receivables which are more than 4 years of profits! Most of these are export receivables and there is huge risk that the books were all cooked up.

ii) Promoter selling stake: There are market rumours that the promoters are selling their stake in the company and they are further gifting shares to their relatives to facilitate this sale.

RS Software

We had a proxy investment on the rise of digital payments. RS Software had just one major client – VISA and you should be well aware of the risk that you take when you invest in a company which gets it’s revenues from one client. VISA cancelled it’s contract with RS Software and the stock price collpased. From a massive 800% gain, we exited only with a 30% – 40% gain over a 3 year holding period. The revenues of the company reflect what went wrong:

Noida Toll

We had an investment in Noida Toll bridge because we were of the view that an increase in traffic on the Delhi-Noida route would generate super strong cash flows for the company. Add to this the growth in advertisement revenues and you had a strong dividend-yield stock which could compound well over a period of time. What better business than a toll way?

The stock price collpased and we lost money in this investment. The total allocation to the portfolio was just 3% and thus the portfolio did not take a major hit. The toll bridge is now free and the company is fighting the case in the Supreme court.

The above table shows how the revenues for the company collapsed, thus eroding shareholders wealth.


Growing revenues, improving margins, a big opportunity for one of the largest security systems company to capture the home security solutions market in a large demography like India. Zicom looked like a very good investment – But it collpased from Rs 131 to Rs 41 in a short span of time after our investment.

Another case of exports, inflated receivables, negative cash flow from operations. Coupled with that – Promoter selling his stake continuously. Even now, the promoter is just selling of his stake in the company as shown by the table below:

The stock price plummeted and we were punished for this mistake. However, the allocation for Zicom in the portfolio was 2% because these red flags were always there. Better the quality, higher the allocation – This is has remained our philosophy.


We have made mistakes and we will make mistakes, not knowingly but because of the inherent nature of investing in the stock markets – There are many variables that can go wrong. We have to mitigate the risks and lose little when we go wrong and make a lot of money when we are right!

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Lessons of Investing

Investing can be a rewarding journey if done the right way! Here we present 5 important lessons of investing which every investor should learn / be aware of.

i) Start Early

The best time to start investing was yesterday. The next best time is today! The earlier you start, the better – Thanks to the power of compounding.
Rs 1 Lakh invested for 10 years @ 15% per annum gives Rs 4.04 Lakhs
Rs 1 Lakh invested for 15 years ~ 15% per annum gives Rs 8.13 Lakhs

ii) Be Patient

While tracking your investments is necessary, letting daily news and doomsday predictions will only make you uncomfortable and impatient. The more you listen to BUY/SELL recommendations on TV; the more you will feel tempted to churn your portfolio.

iii) Short Term vs Long Term

Do not invest your short term funds into your long term investments. Long term investments can be volatile in the short term and you will not be able to meet your financial goals if you keep breaking your investments to meet short term expenses.

iv) No Free Lunch

There is no free lunch. If you invest on the tips of your friends, family and others then you are definitely not being serious with your investments. Will they provide you with the quarterly updates, followup reports, etc? No matter how well your friend knows the promoter of the company ~ steer clear of investments which are not backed by any research.

v) Do it Yourself vs Advisor

You can either do all the research and stock selection yourself OR you can go for a fee-based advisor who can mitigate you through all the nuisances of investing. However, your advisor’s approach to investing should be in sync with your expectations. Someone who gives intraday trading advice will not be able to guide you with the right long term investments!
Like we will not be able to guide those looking for:
i) Futures and Options advice
ii) Short term trading advice
iii) 30-40 recommendations a year

Who should choose us?

i) Those looking to invest for 3 years or more
ii) Those looking for fee-based direct mutual fund and stock advice
iii) Those looking to buy and hold high quality stocks – Investors who see stocks as a part ownership in a business and not as random digits blinking on a screen
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The Next Generation of Wealth Creation

We have a better standard of living than our previous generations and the coming generations will have a much more better standard of living. This is a India centric statement and we shall demonstrate this statement with some facts and figures. So Ladies and Gentlemen, please get ready for reading an article which will leave you optimistic for the future.


To start of with, we have our Gross Domestic Product (GDP) which is a widely used measure for the economy. It is basically the value of everything (goods and also services) produced within the country. After the GDP we have something which every Indian is familiar with – Population. While GDP is a measure of a country’s economy, the GDP-per-Capita is an average number derived by dividing the GDP with the total population.

India’s Statistics

India’s Population

India’s GDP

India’s GDP Per Capita

Since 2002, India’s GDP per capital is growing exponentially. Going forward, this number will only increase and we believe – At a faster pace. Lets understand this using simple maths.

India’s Future


India’s Real GDP growth rate (Adjusted for inflation) is ~ 7% and it is estimated to grow at 7% to 8% for the foreseeable future. India is expected to be one of the fastest growing major economies of the world as per various papers, reports and publications. From a GDP of $2.2 Trillion, we will touch $18 Trillion over the next 3 decades (Growing ~ 7% p.a.)

The Population

India’s population is expected to grow at a net rate of 1.3% p.a. for the next decade and further slow down over the next few decades. Infact, some reports claim that India’s population would start shrinking after 2050-2060. The fertility rates are down from 5.9 in 1951 to 2.3 in 2011 and is expected to slip below 2 in the coming decade. From 1.35 Billion in 2017, our population will increase to 2 Billion over the next 3 decades.
The Wealth Creation

Now when we do the simple math of a $ 18 Trillion economy with a 2 Billion population, we get a GDP-per-Capita of $9,000. In 2016, this figure was ~ $1,750. Though it is better to compute all this is $ terms, for simple understanding let’s break it into Rupee terms. We expect India’s GDP per capita to increase from Rs 1,14,660 to Rs 5,85,000 over the next 3 decades (We have assumed a $ rate of Rs 65.
What we ignore

What we are ignoring in this computation is that innovation and technology have the power to propel the growth rate of our economy. India’s population is shifting from working in the fields to more skilful jobs and India’s biggest challenge is to create enough opportunities to absorb this demographic shift of workers. The largest threat here is innovation (Artifical Intelligence, other futuristic technologies) itself.
Having said that, even at $9,000 per head India will still lag most of the major economies of the world (even in today’s terms). The below chart shows India’s standing when compared to the global average.
The Potential

After India’s fabled 1991 tryst with opening up it’s economy, one would expect India to have propelled itself to the big league! But China has out-performed India on a massive scale. Just look at the historical GDP Per Capita for India vs China since 1991.
Post 1991 chart of GDP Per Capita growth
If India is able to ape China’s rate of growth (or even a bit slower than it) then there will be massive wealth creation for India. This will not be easy as it involves radical measures in terms of economic and political reforms. However, one must note that an increase in GDP most probably will not trickle down to the grassroots proportionately.

What it means for investors

A growing economy will create headroom for booming stock markets. We are just a ~ $2.2 Trillion economy and if we are to indeed grow to $18 Trillion, then over the next 30 years, we can expect $15.8 Trillion of wealth creation. Even if we assume a 100% Marketcap to GDP ratio then $15.8 Trillion of wealth is going to be created.

The wealth creation that you have witnessed in megabaggers like Infosys, Reliance, MRF, Eicher Motors, Maruti, Bajaj Finance, etc over the last 3 decades will be dwarfed by what is going to happen over the next 3 decades! As a long term investor you need to be optimistic and believe in the stock called India.

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GDP Growth vs Stock Market Returns

This post is to primarily study the relation between GDP growth and stock market returns. In the long run, does the stock market return equal (or be close to) the GDP growth rate? Also, do developed markets give lower returns than emerging markets? We will use statistical data and not qualitative aspects like infrastructure, supply of labour and capital, etc (Developed markets have far more vibrant capital markets which make it easy to raise capital).
India is viewed as one of the major emerging economies with high potential to grow its GDP sustained over a long period of time. Post 1991, India has attracted a lot of foreign investment due to various factors such as demographic advantage (young working population), resources and political stability. Indian investors are now blindly bullish on the Indian markets with the following words on every investor’s lips:
Look at the opportunity size, Look at the 140 Crore population, India will post double digit growth for a long time
We are not here to debate on GDP or the growth rate of GDP. It is beyond our capabilities to forecast a 2 trillion dollar economy’s growth over the next 20-30 years. To start off with, we look at Sensex’s performance since its inception:
This is the Sensex chart since its inception. In 1979, the Sensex value was 100 and today it is upwards of 30,000. Lets breakdown the Sensex performance to pre-1991 and post-1991.
Pre-1991 the Sensex went up from 100 to 2,000 in 12 years! Giving a CAGR of 28.36% p.a. and post the “Big-bang” economic reforms of 1991, the Sensex has gone up from 2,000 to 32,000 in 25 years, thus delivering a CAGR of 11.73%. But did the rapid growth of the Indian economy post 1991 slowed down the equity market returns? The GDP growth rate of India has averaged ~ 6% to 7% p.a. since 1991 up from the 4% p.a. average before the economic reforms of 1991. Now we look at the Dow Jones chart from 1991 to 2017:
The Dow Jones index has delivered a CAGR of 8.1% p.a. over the last 25 years and in this period the USA GDP has hardly grown above 4% p.a. with the average being below 3% p.a.
Lets go back to 1991, if you were an investor back then and had to make a 25 year investment in INR terms (ignore the investment regulations for once). Then would you have been better buying the Dow Jones in INR in 1991 or the Sensex would have been a better investment in terms of returns?
Investing in the Dow Jones index would have yielded better returns because of a depreciating rupee coupled with a growing Dow Jones. Inflation in India is higher (Averaging 6% to 7% p.a. since 1991) against the 3% average inflation in USA. Thus, on an inflation adjusted basis the out-performance of the USA equity markets even greater.
(Figures used in this computation are taken from historical data available through various sources, the accuracy of the data is not guaranteed. There will be 50 to 150 bps difference in computation depending on the source of historical data.)
To conclude, the higher GDP growth rate has not translated into higher returns through equity markets. We are not being pessimistic on the potential of returns from Indian equities but assuming sustained higher returns than the global average can be a folly on an investor’s part. The risk premium being paid by the investors is very high and may not be justified in the long run.
Ultimately, investments in equities are driven by greed and fear. The current sentiment is that of greed and the fear of missing out and investors should be careful about blindly investing in businesses they don’t understand and should definitely not overpay for what they own. Individual stocks can definitely out perform the broader markets (as visible from the last 10 years performance) and that is what our research services are focused on.