Wednesday, October 31, 2012

Invisible Hand

Recently I was introduced to a real estate investment opportunity in Bangalore outskirts along with a few other friends. The views after seeing the property were very diverse from excitement to resistance to predictions of the future. It was interesting to see that, to what some of them considered a great opportunity there were an equal number who were negative about it. The ones who took a negative view said that the development had not started on the project and that it would take many years for the area to boom. Now as investor would you not look at those as reasons for a favorable valuation? Investments are made at times of extreme uncertainty and when full potential is not realized. The favorable ones said, you do not wait and invest, you invest and wait. A very successful real-estate investor remarked, with investments in real-estate, just ensures you have choices when buying and have plenty of time & patience while selling and success is assured.
This month’s investor meeting was with an equity researcher whose name I withhold. He had devised a PE ratio based contrarian program that can be used by any retail investor. It does not require a lot of time, yet very effective in the way it is designed. He has validated his research over the last 10 years data. To make the choice of stocks sound, he suggests the retail investor to look at the 100 companies from CNX-100 index. This way we ensure a level of filtering for the small investor who lacks the domain knowledge. To reduce time& amp; effort involved, he recommends transacting and examining portfolio only once a year. The investor in this program buys a list of 10 stocks that have the lowest PE from the sample of 100 CNX-100 stocks on a particular day. He then blindly holds it for a period of one year and a day. The portfolio is liquidated after one year and a new portfolio is formed with 10 new low P/E stocks, some of them might be old ones.
You are also taking out the profit at the end of every year and leave only the initial investment in it. This way you can make it an asset that is generating income, excepting when the return in a year is negative (during the research period 2000 to 2011, there were 2 such years were returns were negative). By holding it for a period of 1 year, you are not subjecting the income generated to taxation.
The results show that of the 11 years, 9 years portfolio offered superior return. The average yearly return is 51%, which is pretty impressive. We could use different variations of this program by changing the holding period to 3 or 6 months or using cnx500 companies instead of 100 etc. For a copy of the research data, please write to me on
The pace of change intensifies in this competitive rat eat rat environment. The lobby power still remains supreme in businesses with large capex requirements. Corruption and greed make it difficult for the just-wise to make a living as crony capitalism and muscle strength reign over knowledge and logic. The revolution for collective awareness is underway. How then do honest companies and individuals continue to grow? The power of invisible hand says if individuals pursued only their interests, they would promote the public welfare which was not part of their intentions; they were led by an invisible hand.
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