This has become an interesting annual exercise where I track stocks recommended at the end of the year by the various research houses from big investment banks to brokerages. After all, there are the folks with high-powered research teams equipped with bloomberg terminals. You would expect them to outperform the simplest way you could invest, i.e. buying the index.
Recap of how the professionals did in 2019
Here’s how the professionals did.
The 13 research teams I tracked recommended a total of 98 stocks (with overlaps). If you had invested equal amounts of money in their stock picks, you would have made 6.4% in 2019. That’s less than half the NIFTY’s 13.6%.
Within the 13 portfolios there is a fair bit of divergence. 3 of the 13 research teams beat the index. Morgan Stanley, Centrum Broking, and Standard Chartered. Two of them, Macquarie Research, and CLSA are down for the year. The remaining are somewhere in the middle.
Before you conclude that the top performers in this table are the “best stock pickers” and the others should probably find other professions, consider what they recommended back in Dec 2018:
Morgan Stanley’s 2019 Picks (Overall +19.8%)
Centrum Broking 2019 Picks (Overall +14.2%)
Macquarie Research 2019 Picks (Overall -22.9%)
CLSA 2019 Picks (Overall -11%)
The complete list of recommendations from all 13 research teams is here.
Hindsight is a fantastic thing. But realistically, back in Jan 2019, would you have reacted differently to the first two sets of recommendations versus the next two?
Past posts on tracking professional recommendations:
This is not about saying one set of professionals is better than another, but that being right in the short-term is pretty hard, even for the experts. Nobody Knows Anything.
With this in mind, what do the professionals recommend in 2020?
The complete list of 2020 stock recommendations
First, the clear disclaimer: This list is not a recommendation
What do I make of these recommendations? A top-down sector-driven method has never quite fit in my investing mental model. I looked at history and while being in the right sectors helps, I’m not good enough to be able to identify those sectors in advance. Does sector-picking trump stock-picking?
In my conversation with Raunak (Head Research at PPFAS Mutual Fund), he spoke of the importance of building sector-specific insights but being company-specific in investment decision-making.
Thinking about investing as a competitive sport is likely to be injurious to wealth. Tracking the outcomes of even brilliant investors while not understanding their process, allocation, and ability to tolerate losses, is like stepping into busy traffic blind-folded. Fixating on Buffett is hurting your returns
If you enjoy the process of fundamental analysis of companies and stocks, here are some great resources you can use. Fundamental Analysis Tools for Indian Investors.
What will markets do in 2020?
I have no idea.
Mid and Small Caps have been abysmal for the last couple of years. I crunched the numbers to see how various sectors and market caps have done.
For every stock that advanced, 6 declined.
Of the 1,900+ companies we analyzed, just over 15% (1 in 6) have increased in value over the last 18 months, adding 24% cumulatively. 84% have lost a whopping 32% together. The remaining 1% were new listings.
Going by the “Quality Investing Works” theme, I looked back at one such case back in the 1970s in the US and tracked how they did over the next few years.
Owning high growth, high ROCE, high P/E companies is not the problem. Our immediate expectations from owning them are.
I compared valuation differences across sectors to try and idenitfy which ones might be due for a rebound.
- Valuation multiples (EV/EBIT: Enterprise Value / Earnings before Interest & Taxes) are indicators of investor willingness-to-pay for future earnings growth
- Some sectors currently see a narrow range of multiples while others see broad ranges
- Analysis of what drives multiples suggests three key metrics: Sales growth, Return on Capital Employed (ROCE), and Cash-Flow from Operations as % of Net Profit are the key factors driving valuation multiples
- Current multiples might be overly optimistic for some sectors and overly pessimistic for others
In the absence of being able to forecast what and who might win in the future, applying a trend-following / momentum based strategy can help outperform broader markets. I did a backtest of applying such a strategy to 13 years of Indian stock market data
- Contrary to how it might seem in financial media, momentum as an investment strategy has been around for the better part of a century.
- Empirical studies going as far back as 1801 have shown momentum works, not just in equities, but across asset classes. Momentum outperforms broader markets.
- Momentum outperforms benchmarks in India. We extensively backtest a momentum strategy against portfolios of randomly selected stocks, and against the benchmark indices.
Have a great 2020!