Author Topic: "The Nifty Fifty" - yesterday and today  (Read 11115 times)

Patmo

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Re: "The Nifty Fifty" - yesterday and today
« Reply #10 on: April 12, 2015, 08:32:41 PM »
I recently read Howard Mark's book The Most Important Thing and he too made mention of the "Nifty Fifty" and the expectations associated with them at the time. He did concede that the Nifty Fifty actually outperformed the S&P 500 (I don't recall the time period he used) almost entirely thanks to the growth of Phillip Morris. The lesson of the Nifty-Fifty as I see it isn't so much the relative overvaluation associated with some of the stocks at the time, it's that a couple truly great stocks can make up for a lot of mediocre ones, even if they were all overvalued when they were purchased. Now, how do we find the next Phillip-Morris in today's "Nifty-Fifty"  ;)

Takeaway I've always had is that if you can identify the PM's then you don't have to worry about valuation most of the time. 20x - 25x is actually cheap/reasonable if the company can grow earnings 15% over 15 years or something. Obviously identifying this is tough but it seems like the lowest risk way to earn 15%+ returns over long periods. It also seems possible.
I'd argue that it's not the lowest risk way if the identification part is tough. You can get similar returns by thoughtlessly buying a basket of purely cheap securities based on the metric of your choice, and it is a pretty easy task to identify them. You know better than I do the number of studies that have shown that. Why jump over higher hurdles?


Jurgis

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Re: "The Nifty Fifty" - yesterday and today
« Reply #11 on: April 13, 2015, 08:04:21 AM »
You can get similar returns by thoughtlessly buying a basket of purely cheap securities based on the metric of your choice, and it is a pretty easy task to identify them.

I am not sure I agree with this.

"similar returns" - what returns?
"it is a pretty easy task to identify them" - is it? Are you suggesting a value-weighted index fund? I have not seen people have great returns with "thoughtlessly buying a basket of purely cheap securities" despite any studies that indicate otherwise.
"Before you can be rich, you must be poor." - Nef Anyo

Pelagic

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Re: "The Nifty Fifty" - yesterday and today
« Reply #12 on: April 13, 2015, 03:46:32 PM »

I'd argue that it's not the lowest risk way if the identification part is tough. You can get similar returns by thoughtlessly buying a basket of purely cheap securities based on the metric of your choice, and it is a pretty easy task to identify them. You know better than I do the number of studies that have shown that. Why jump over higher hurdles?

We're kind of back to the question brought up earlier in the thread though. If you find a basket of say 50 purely cheap securities why not go with a smaller sub-set based on a metric like cheapness or quality etc. If you can identify a basket of 50, why not just pick the 18 best or the 12 best and go from there, this doesn't seem like adding much of a hurdle once you come up with the criteria to select the initial 50. Personally, I'm torn on this and in practice tend to gravitate toward a more concentrated approach although I'm not sure if it's correct.

For one, the selected basket method has some appeal, especially if your primary metric is "cheapness". While an imperfect analogy, think of it like the way venture capital funds invest, a lot of losers, a couple breakevens or small gains and a home run, if they're lucky. If you buy a basket of the absolute cheapest companies you can find, hopefully some revert to something close to what you estimated fair value to be but the appeal of a larger basket is that maybe one or two will not just reach fair value but really take off.

Maybe you're right, keep the hurdle low and relax. But, the temptation of identifying great compounders is always there and perhaps more than anything its an intellectual pursuit and that's why so many investors put in the time and effort to try and find great companies.

Patmo

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Re: "The Nifty Fifty" - yesterday and today
« Reply #13 on: April 14, 2015, 02:17:10 AM »
You can get similar returns by thoughtlessly buying a basket of purely cheap securities based on the metric of your choice, and it is a pretty easy task to identify them.

I am not sure I agree with this.

"similar returns" - what returns?
"it is a pretty easy task to identify them" - is it? Are you suggesting a value-weighted index fund? I have not seen people have great returns with "thoughtlessly buying a basket of purely cheap securities" despite any studies that indicate otherwise.
1.Similar returns to what was suggested by the poster I answered to, not sure why you have to ask...
2.Sure, that's one way. But I am talking conceptually. What is harder, identifying a company that has a low EV/EBITDA, or a company that will compound at 15% for 15 years? The question answers itself.
3.Your personal observation is great, but it's not because nobody does it that it doesn't work. Whether you agree or not doesn't matter, it's a well documented phenomenon.

Jurgis

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Re: "The Nifty Fifty" - yesterday and today
« Reply #14 on: April 14, 2015, 03:01:20 PM »
If you think that you can get 15% annual returns by mechanically buying a basket of low EV/EBITDA stocks, have fun, good luck.

If this worked, this forum would be empty.

"Before you can be rich, you must be poor." - Nef Anyo

Patmo

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Re: "The Nifty Fifty" - yesterday and today
« Reply #15 on: April 14, 2015, 05:35:59 PM »
If you think that you can get 15% annual returns by mechanically buying a basket of low EV/EBITDA stocks, have fun, good luck.

If this worked, this forum would be empty.

If it didn't, this forum and the term "value investing" wouldn't exist.

Jurgis

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Re: "The Nifty Fifty" - yesterday and today
« Reply #16 on: April 14, 2015, 07:52:02 PM »
If you think that you can get 15% annual returns by mechanically buying a basket of low EV/EBITDA stocks, have fun, good luck.

If this worked, this forum would be empty.

If it didn't, this forum and the term "value investing" wouldn't exist.

IMHO, this forum is not about mechanically buying anything.

However, if you seriously have a mechanical strategy that gives 15% annual returns by mechanically buying a basket of low EV/EBITDA stocks, yes, people would use it. Can you share it with us?
« Last Edit: April 14, 2015, 09:11:20 PM by Jurgis »
"Before you can be rich, you must be poor." - Nef Anyo

Patmo

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Re: "The Nifty Fifty" - yesterday and today
« Reply #17 on: April 15, 2015, 05:22:42 AM »
If you think that you can get 15% annual returns by mechanically buying a basket of low EV/EBITDA stocks, have fun, good luck.

If this worked, this forum would be empty.

If it didn't, this forum and the term "value investing" wouldn't exist.

IMHO, this forum is not about mechanically buying anything.

However, if you seriously have a mechanical strategy that gives 15% annual returns by mechanically buying a basket of low EV/EBITDA stocks, yes, people would use it. Can you share it with us?

The pool of cheap securities outperforms which is why value investors look at this pool to build their books in the first place. If value didn't work, there would be no value investing. You can figure out whichever way you want to rationalize not looking at this specific area of the market for your own means, as they say there's more than one way to skin a cat, but I'm merely stating the facts. You can argue that the earth is flat all you want, it simply isn't.

thepupil

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Re: "The Nifty Fifty" - yesterday and today
« Reply #18 on: April 15, 2015, 06:22:14 AM »
I think Jurgis is taking issue with your return number, not whether or not value outperforms over time.

15% over time is reee - donk - you - lous and should not be expected of any mechanical process.


Jurgis

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Re: "The Nifty Fifty" - yesterday and today
« Reply #19 on: April 15, 2015, 07:53:48 AM »
I think Jurgis is taking issue with your return number, not whether or not value outperforms over time.

15% over time is reee - donk - you - lous and should not be expected of any mechanical process.

Exactly.
"Before you can be rich, you must be poor." - Nef Anyo