Monday, January 11, 2016

Equity’s a hit-or-miss affair

If you’ve been avoiding equities, the big numbers delivered by the multi-baggers may tempt you to take the plunge. Why not simply throw a dart to pick some stocks and hope you get lucky? The odds of that happening are pretty low. Before taking a gamble like that, you should pay heed to the other side of the story — that of the 10-year wealth destroyers.

Small-cap stocks are retail favourites and many of the wealth-creators of the decade were obscure names way back in 2005. Then, Ajanta Pharma (Rs.94 crore m-cap), TTK Prestige (Rs.145 crore), Indo Count (Rs.80 crore m-cap) and Somany Ceramics (Rs.56 crore) were certainly small-caps even by 2005 standards. But while some small-cap stocks do scale up, small and mid-cap stocks as a category have an alarmingly low survival rate too.

In the above analysis, for every stock that got its investors to a 26 per cent CAGR in the last 10 years, there were five that turned out to be duds. Excluding the firms that dropped off the radar because of mergers/acquisitions or other corporate action, as many as 40 stocks of the 788 (that an investor could have picked in 2005) have since stopped trading on the market.

They have either turned illiquid or have been suspended from trading due to regulatory infractions. As many as 36 of these 40 stocks were small-caps in 2005 (they had a sub-Rs.500 crore market cap).

A third of the stocks (257 of 788) have delivered negative returns to their investors after a 10-year wait. As many as 150 stocks out of these have suffered a value erosion of 50 per cent or more. That is way more than the number of multi-baggers and underlines the risks of dabbling directly in equities. The list of losers includes some fancied yesteryear names. Bharati Shipyard has fallen all the way from Rs.333 to Rs.28. Financial Technologies has suffered a value erosion of over 90 per cent. Subex (97 per cent), 3i Infotech (down 94 per cent) and Today’s Writing Instruments (down 95 per cent) are the other unexpected entries in this list.

Tracing the history of some of these firms suggests that with businesses that are seeing a deterioration in revenues or profits, your best bet is to let go at any early date.

Take hardware major Moser Baer, a dominant player in the Indian DVD and compact disk market ten years ago. As the CD/DVD market suffered steep price erosion due to cheap imports, the company tried to shift gears — into BluRay disks and later into solar photovoltaic cells. But neither foray has helped revive the firm’s fortunes. So, if you bought the stock in 2005 at Rs.131 (adjusted price), it halved to Rs.62 by 2010.

But if you thought things couldn’t get any worse, it plunged to Rs.10 by December 2015. There are many other instances, too, of stocks that have halved and then halved again to decimate wealth. Sterling Biotech slipped from Rs.122 to Rs.103 between 2005 and 2010, and then fell off a cliff to less than Rs.10!

All this tells you that if you aren’t clued into company fundamentals and don’t have the bandwidth to track the fortunes of the sectors you own, you shouldn’t buy and hold individual stocks at all. Diversified equity funds may serve you better.

Even the worst performing diversified equity fund hasn’t delivered a loss if held for 10 years (it gave a modest 2 per cent CAGR).

But if you’re keen on riches beyond your wildest dreams, equity funds probably won’t satisfy you. The best diversified fund delivered an 18 per cent CAGR in the last ten years, while the top multi-bagger stock notched up a 62 per cent CAGR.

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