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BW Businessworld

How We Did It

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When we began this survey to discover the companies that have made investors like you the most money, we were conscious of two important considerations. The first is that most research suggests that over the long-term, a stock-picking strategy does not beat the market (because of the effects of timing, or when you buy). Those studies look at how the average investor has done versus the benchmark index and, usually, the findings suggest that she has done much worse. The second is the cornerstone of all markets, Eugene Fama's efficient market hypothesis (EMH): if all the information is available to all participants at the same time, you cannot consistently get returns that are in excess of market averages. The theory has been challenged in recent years, but has not been supplanted by another yet. The trouble is, none of us thinks of ourselves as the average investor: each of us is unique, as people and in our approach to stockmarket investing.

On the other hand, there are companies on whose stock returns have consistently beaten their peers and the market averages — often by several orders of magnitude. This survey is our effort to find out which ones, and how they did it. We started out with a universe of 5,100 listed companies that were part of the database we use, Ace Equity, and that had been listed for at least three years. First, we categorised them on the basis of sales: above Rs 20,000 crore (super heavyweight), Rs 5,000-20,000 crore (heavyweight), Rs 1,000-5,000 crore (middleweight), Rs 500-1,000 crore (lightweight) and Rs 100-500 crore (featherweight). We left out all companies with sales less than Rs 100 crore. Internally, we debated whether sales were a better basis for categorisation than market capitalisation. Market capitalisation, we believed, would result in comparing apples to oranges in that the size of the equity base varied widely across companies.

So we picked sales. When we conducted this survey last year, we had restricted ourselves to just reviewing 10- year returns. This time round, we decided to expand the scope of this survey to capture return performance across shorter periods; the idea was to provide greater granularity. Next, we applied different benchmarks for different groups for determining market averages: the Nifty50 for super-large and large, and the BSE500 for the mid-size and small categories. Third, we picked four periods for estimating returns: 10, 5, 3, and 1 years. This would enable discovering consistency in performers and help identify trends that impacted stock values and market return performance over different time frames. Fourth, we set a liquidity parameter: the stock would have to be traded for at least 100 days in the financial year. That would eliminate (or at least substantially reduce) any effect of possible price manipulations. Another liquidity parameter was that the public should hold at least 25 per cent of the outstanding shares (this would take out government-owned firms and companies such as Wipro).

Finally, we set a performance standard: companies would have had to beat market benchmarks for at least 7 out of 10 years, four out of five years, and three out of three years in the four periods for which we were estimating returns. The rationale was simple: to identify companies that perform consistently through good times and bad. By comparing the lists across the four periods, we discovered some firms that made three out of the four lists. Over the past 10 years, there have been two five-year cycles: the market boom from 2003 to 2007, and the crisis-driven fall thereafter across all markets, and the economy as a whole. There have been several kinds of volatility that have affected stock prices, stemming from a mix of several factors — domestic as well as global.

The survey captures stock performance through ‘the best of times and the worst of times', so to speak. Most investors do not think in 10-year time frames when it comes to investing in specific stocks or in portfolio planning. Yet, as the survey demonstrates, it is possible, and the rewards can be great.

(This story was published in Businessworld Issue Dated 28-05-2012)