Posted by: alok | December 2, 2005

Beating the Street…..

“One up on Wall Street”, “Beating the Street”, “Outperform Market”, and many many more…. You must have heard of these phrases a lot. And these get prominance when the likes of Peter Lynch, George Soros author books with these names…!!

And Rakesh Jhunjhunwala, Ramesh Damani and many more barrons of our very own Dalal Street, give their views and suggestions on the market, people do listen…. and why not, these gentlemen have made huge money on dalal street, and more often than not their suggestions end up in creating bullish sentiments for their stock. Then next in line are other brokering houses who give tips and then there are ‘Your friendly brokers’ who usually give you a ‘Hot Tip’ and you are caught in the frenzy.

Then you read success stories of small-caps who became multiple-baggers in just few weeks. If you are a patient investor, you read and get awed by success stories of Shoppers Stop, Infosys etc. Then you do ‘back of the envelop calculation’ (one of the cliche at B-Schools) and find your money would have grown 7-8 times if you invested in so-and-so company on s0-and-so date. Your face droops, and you grim, give a punch on a concrete wall for having missed the opportunity..!!!! Stock market is really crazy….

So what does it actually mean to ‘beat the street’? In simple words it means get returns higher than that what the general market is giving. But what is this ‘general market’ – is it ‘BSE 30′, Nifty’, BSE-MidCap’, and across Atlantic ‘S&P 500’, and to your east ‘Nikkei’? Now we all know investing in penny stocks is risky and heard or read people loosing on these bets. So lets take the best on Indian Wall Street – aka Dalal Street, the BSE-30. Its an index of 30 ‘most valuable companies’ (Are they really that valuable or not– a question to be discussed later on).

So if you try not ‘beating the street’ but just ‘replicating the street’ – what would have happened? Your ‘friends’ or your ‘trust-worthy brokers’ would have told you ‘You are foolish – so and so company was a multibagger and beat street 4-times)’. My 2-cents “If you just replicated the street the so-called ‘slow moving elephant the BSE-30′ you would have grown your money 9 times in just 15 years…!!!!! (Sensex was 1000 on July’15 1990 and 9000 on 28th November’ 2005) An compounded yearly return of more than 20%…!!! And don’t forget this is after so many scandals – the ‘Harshad Mehta’, ‘Ketan Parekh’, and general downtime of ‘global slowdown on 2000-2003’ and ‘the Black Monday’ when BJP’s India Shinning campaign went bust.

A message to all… even if you are not the ‘hep-type’, ‘dalal street – sycophant’, and just be a patient ‘buy-and-hold’ strategist… you would have made more money than your ‘stock advisor’…!!!!

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Responses

  1. Hey but arent you again relying on historical data to back your conclusion…

    The questiion is abt the future and not sure whether the entire finance theory can handle that with confidence

  2. Mr. Anonymous,

    You probably missed out the key message that i am trying to convey and that is, if you are not into derivative segment, DON’T try to trick/time the market, use simple ‘BUY AND HOLD’ strategy.

    And you pointed out correctly that ‘entire finance theory cannot handle future with confidence’. If anyone can tell with 100% confidence that a flip of a coin will give tail the next time… he would have more money than bill gates and warren buffet combined…!!!! Stock price is stochastic, and hence is uncertain. If you have time, read ‘Random walk down the wall street’ 🙂

  3. I am not clear how you can make money(trick the market) using derivatives.If anybody can make money using derivatives…would arbitrage not come into picture and not allow it??
    Aren’t derivatives good as hedges rather than making money…

    –A learner

  4. This post has been removed by a blog administrator.

  5. This post has been removed by a blog administrator.

  6. Hey Dude,

    Came across your blog! Interesting stuff! You write well. Only issue is you use a very small font. Sometimes it becomes a strain to the eye.

    Thanks,

    Amardeep

  7. Thanks Amardeep,

    Sorry about the small fonts, but somehow I am obsessed with small fonts 🙂

    On the positive side, you cna read the entire blog without using the scroll-bar..!!–>


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