Sunday, May 13, 2012

Infosys in the year 1994

A favorite example given by colleagues from the fundamental analysis area is Infosys. They tell us - "if you had bought Infosys in 1994, see how much you would have gained! This is the reason you should always stay invested in stocks".

I have many problems with this analysis.

--> This statement assumes Investors 'knew' in 1994 that Infosys will become a multi bagger.

--> For One Infosys that became a multi bagger there were 500 stocks that did nothing or even vanished. Given to choose between 501 stocks to invest, Investors would discard 500 and select the only one that moved up.

--> The analysis is history. Suppose you did not buy Infosys in 1994. Now what? Does this mean this one mistake has closed all doors for investing in the future?

--> Together with Infosys, there were many other IT stocks that promised a great future. Two of these were Pentamedia(delisted, share price became almost zero) and Satyam (share price is much lower than original investment). What was the reason to choose Infosys and not satyam?

--> The key question is: what should the investor do now. This question remains unanswered except for a general idea to remain invested in stocks.

--> Not all stocks give returns. Even top quality stocks can remain flat for years. Hindalco was 110 in 1994, still is 110 after 18  years. (Prices are adjusted for bonus etc,.. We are comparing apples with apples). Hind Unilever remained in a trading range for 10 years. How can the investor say: this is a good quality stock but it is not going to go anywhere, while this will be a multibagger.

--> It assumes that multi baggers can be forecast in advance.

--> It also implies that the listener is probably a fool if he did not identify multi baggers and buy them. Well, I must be a fool, then.

Reader comments are welcome. This is the first part of my views on investing. A second, concluding part will follow.

8 comments:

ITradeForProfit Daily said...

Sir,

The trading community as a whole is a leaking bucket. There are always more losers and hence more quitters from within this community, and that is what makes it a leaking bucket.

The Fundamental analysts, with their pep talk, are always able to bring in more losers to the table, thus keeping topping up this leaking bucket.

Without these Fundamental analysts, we would not have enough traders to run the markets.

Fundamental analysts are a necessary evil if you may call them so.

We all must thank them, and wish them good luck.

Naran said...

Thank you very much sir.This article so helpful for me ...................

Jitender said...

You raise interesting point. Couple of years back when market was declining from all time high, I has started into stock market and had bought HDIL at somewhere 796. At that time I read report on it from few of brokers and everything was so convincing that this stock has potential and target given was 1100. Fortunately I had bought two units of HDIL only. As the time passed it declined and I started to get feel the way market moves up and down. I had seen then price of 63 of HDIL as well in that decline. 300+ price for HDIL can be good for a person who bought at 63 but not for one who bought at 796. At 63 everything was negative and at 796 everything was positive.

Then I started to realise that any such report is not reliable because I am dependent on others for research. Sentiments change in fraction of time. With this I started to get into stocks which in one or other way I have feel around me. Basically these stocks are among top 100 stocks in NSE. With a bit of diversification, SIPs I am enough protected to get reasonable returns from market. I have no expectation for more than 15-20% annual returns from stocks. I have a job to invest time into rather than hunting for the treasures. For treasures can not be searched systematically they just come randomly. In search of one random treasure I am not ready to bet my money. I am rather more happy to take a small pie from treasure once it is fully identified. Even investing in a good stocks without a look on chart is a bad idea for me now. I have a friend from Mumbai who tells me few of smaller stocks which he feels will turn multibagger and I have told him several time that I do not put money into stocks which are are touted as multibaggers by others. Minimum criteria I have set now is price above 100 and daily traded volume above 1 lakh shares and must be listed on NSE.

Rushabh Shastri said...

I have come across good multibagger like JUBLFOOD, TITAN, PAGE INDUSTRIES, TREE HOUSE...one common thing I found in all this was a THEME...Jublfood was first of its kind so as page and treehouse,,,,while TITAN due to its new model of retailing as well as branding....so should we conclude that MCX, SKS, VABUG,,,,must also do good....its not thumb rule...then question arise what makes THEME special depending on company....So i must say its management only who can make theme success for the investor...GOOD MANAGEMENT EVEN CAN TURN BAD COMPANY,,,BUT BAD MANAGEMENT wont help the nicest of business.

Balu said...

@Rushabh

Dear Rushabh,

The common theme you might have found in your list of stocks is actually not the THEME but I believe it's the 'TREND'(the only truth on this earth like mother's love for the child). Fundamental analysis or investing, I think is the biggest faltoo item anyone can find. I really don't understand how those two fellows Rakesh Jhunjhunwala and Warren Buffet could do business without technical concepts.

Balu

Bashu said...

Hi,

Warren Buffet's compunded annual return is 19.% for last 45 years.

"Market Wizards" series book tell us about many traders with much better track record for like 25 - 30 years.

Why is Warren Buffet so famous and other traders are not?

ramabhat said...

"....They tell us - "if you had bought Infosys in 1994, see how much you would have gained! This is the reason you should always stay invested in stocks".

I have many problems with this analysis...."
You have hit the nail on the head Sudarshan Sukhani Sir !!! This is an absolutely wrong piece of logic.

ramabhat said...

"...."if you had bought Infosys in 1994, see how much you would have gained! This is the reason you should always stay invested in stocks".

I have many problems with this analysis...."
You have hit the nail on the head Sudarshan Sukhaniji !!!! It is an absolutely defective piece of logic. It sounds like logic made by politicians in their speeches to buttress their own arguments.