I can tell you from vicarious experience that delivering a talk to a bunch of IIM students is definitely not a walk in the park. These students do their homework on the subject before they come to listen to you. Also, they have a razor-sharp intellect and are able to pick up nuances and contradictions in your talk. Further, the students are trained not to accept anything at face value or as the gospel truth but to question and cross-question it till the logic becomes bare. So, if you are not thoroughly prepared and quick-witted to answer the barrage of questions that will be fired at you, you are in for a rough time at the hands of the students.
Basant Maheshwari, our friendly neighborhood stock wizard and author of the best-seller ‘The Thoughtful Investor’ found himself in this unenviable position when he landed up in Ranchi to deliver a talk on ‘Investment strategy’ to a bunch of bright-eyed and knowledge-hungry IIM students.
However, to his credit, Basant held his ground and came out of the inquisition with flying colors.
Basant made several interesting points in his talk. One of the seminal issues that he raised was that we should ask ourselves whether we are seeking to make ‘Quick Money’ or ‘More Money’.
Basant explained that there are basically two types of stocks one could invest in. There are stocks that appear to be on ‘steroids’ with the ability to deliver quick-fire returns in the short-term. These stocks have a lot of risk attached to them. In contrast, there are stocks which appear to be sluggish but which can be trusted to consistently deliver a moderate return of 20-30% over several years in the future with minimal risk of capital loss.
Basant pointed out that while the stocks-on-steroids provide a lot of excitement, they invariably run out of steam after the initial burst. In contrast, the slow-and-steady stocks continue to churn out returns for decades to come.
Basant made it clear that he is not enamored by the stocks-on-steroids. Instead, he prefers stocks that deliver a consistent rate of return. At 30% CAGR, the investment more than doubles in 3 years. In 10 years, it grows 13 times and in 25 years, it grows 705 times, he exclaimed, much to the astonishment of the IIM students.
So, while you can make “quick money” with the stocks-on-steroids, the “more money” comes with the slow-and-steady stocks, Basant emphasized.
Basant also made the important point that one has to balance risk with reward and ensure that the risk of a loss of capital is minimized to the extent possible. So, if one has the option of investing in a blue-chip company for a 25% return and of investing in a dubious company for a 40% return, one should choose the blue chip company because the reward of a potential 40% from the dubious company carries the heavier risk of a permanent loss of capital.
Basant further explained that with the stocks-on-steroids, one can never allocate a large part of the capital because you never know when the story could run out. Also, you have to keep a vigil and constantly look over your shoulder for lurking dangers. The result is that you end up with a highly diversified portfolio which dilutes your returns. In contrast, you can invest a large part of your wealth in the slow-and-steady stocks and be assured that compounding would work its magic on your portfolio. You can also afford to maintain a concentrated portfolio.
Unfortunately, Basant did not name any stocks. However, my guess is that he had in mind his all-time favourite stocks like Page Industries, Hawkins Cookers, Repco Home Finance, Gruh Finance etc. These stocks are growing at a steady clip of 25 to 30% CAGR and will not spring an unpleasant surprise on you anytime in the foreseeable future.
In contrast, the stocks-on-steroids could be Avanti Feeds and RS Software, both of which have delivered mind-blowing returns in the recent past. However, the moot question is how much of capital can you really entrust to these stocks given the inherent vulnerability in their business models. In the case of Avanti Feeds, a climate change, floods, disease etc can torpedo the business while in the case of RS Software, an adverse decision by Visa, its major customer, can send fortunes tumbling over the cliff.
So, if one is investing for the long-term and is desirous of creating serious wealth, one is better off with the slow-and-steady stocks is Basant’s timely and valuable advice.