Besides, stock prices were catapult-ing and there was what seemed like anever-ending ﬂood of foreign moneypouring in. For ﬁve straight years tillJanuary this year, the Sensex provedthe sceptics wrong at every level as itrapidly scaled new all-time highs, re-covering almost immediately afterevery tumble. And investors continued to buy intostocks, whatever the price.Then, the inevitable happened. Glob-al markets nosedived and over thenext few months, continued to plungeas bits of bad news kept leaking outat a steady pace. Investors who hadbought stocks at steep valuations now began to understand just how foolishtheir actions were, not to mention thespeculators who had joined in for thefree ride. Value investors had seen this comingall along. At a lecture in India on Janu-ary 8, Bruce Greenwald, renowned ﬁ-nance professor at Columbia BusinessSchool, referred to stocks markets as‘being expensive’. At the time, stocks were actually peaking out. Greenwaldteaches the ‘Graham and Dodd’ styleof investing in the university Grahamgraduated from. Value investing is not about predict-ing when markets will hit their peaks.Graham (and today’s value investorsagree) emphasised the preservationof capital as the bedrock of investing.“The beauty is, as Graham said, any-thing bought cheap will invariably goup in price,” says Chetan Parikh, asuccessful Indian value investor andmanaging director of Mumbai-basedJeetay Investments.There is one difference though. What Graham considered bargainsand what today’s value investors con-sider as cheap (and we are not talkingabout growth-style investors who donot mind paying a high premium forstellar growth prospects) are separatedby time.
13 June 2008
CASH BARGAINS PORTFOLIO
Portolio consists o stocks with cash and marketable securities greater than market cap
year1 yr2 yr 3 yr4 yr5 yr6 yr7 yr8 yr9 yr10 yrLatestPortolio 199856.3013.47-45.88-22.24-12.962.035.9815.4110.658.688.42Sensex1998-17.007.82-4.23-4.46-5.885.916.3214.7514.8015.7414.78Portolio1999196.20-25.04-15.97-14.894.0124.8225.8721.0325.3926.24Sensex199940.052.870.12-2.8711.2010.8020.1819.5520.1018.92Portolio2000-45.69-37.70-3.116.5519.2419.6518.0529.1428.81Sensex2000-24.44-15.34-14.034.975.7317.1516.8717.8116.56Portolio2001-13.43-3.3031.7553.6466.8263.8874.1977.32Sensex2001-5.14-8.2917.1315.0027.9025.6925.5323.83Portolio2002-2.9839.6773.5186.9876.9684.3584.91Sensex2002-11.3330.1622.6237.8232.9631.5329.30Portolio200366.00109.10105.9969.2255.70%57.67Sensex200391.0644.2059.6447.1442.3339.09Portolio2004169.39120.5392.6549.2251.58Sensex20048.8345.9334.8732.2328.88Portolio200576.2240.8661.4266.43Sensex200595.6750.1341.1035.96Portolio200658.5028.6256.86Sensex200615.1919.8114.92Portolio200753.6737.15Sensex200718.8218.82Returns or 2007 portolio until May 27, 2008
Earnings yield portolio: A portolio o 30 stocks with the highest earnings yields, theminimum cut-of being double the bond rate or the respective year, rom the BSE-500 universe, excluding nancials, with a debt-equity o less than 1. For years thatthrew up less that 30 stocks, we went with the available stocks.Net-nets & cash bargains: All listed companies with a trading history o more than 90per cent excluding nancials was taken as the universe. We calculated net-nets bydeducting debt and current liabilities rom current assets. The 30 or available stocksor the respective years with market-cap less than net currents were consideredor the portolio each year. Companies with cash and marketable securities lessall external liabilities greater than the market-cap constituted the cash bargainportolio or the respective years.Dogs o the Nity: Top 10 stocks based on dividend yield at the end o every year.
We computed total returns (price appreciation plus dividend income) or theportolio constituted every year and with a holding period o 1-10 years or theperiod 1998-2008. For dogs o the Nity we tested results only or a two-year holdingperiod. In the case o a stock getting delisted or stopped trading, we considered thestock to have lost 100 per cent in the year in which the stock disappeared rom theportolio. All data has been sourced rom CMIE Prowess.
HOW WE DID THE BACK-TESTING