The number we won't hide

Summary: A subscriber asked why nine years of Stock Advisor calls beat the index by only about 1 per cent. This piece answers by showing how to read that blended number: why a winning percentage matters less than the size of the winners, and why quality portfolios look unremarkable in falling markets.

A few days ago, we did something no business like ours does. When we gathered our subscribers for one of our regular live sessions with me and my team, we started by putting up our worst stock calls on the screen. These were 15 stocks that, since our recommendation, have returned half or less than what the market did, and then we took our members’ questions.

I began this way because of the shift in investors’ mood we have seen recently. For most of the past year and a bit more, our members’ questions indicated fear. The market situation was grim, and people wanted to know how not to panic. However, in the last couple of months the mood has shifted: the markets have now fallen for eight straight weeks, something that last happened in April 2001. People are now asking what the point of all this research and patience is. Is any of it actually working, or is it just a ritual?

One of our members put it very sharply indeed. He said that since we began this service nine years ago, our recommendations are only about 1 per cent ahead of the BSE500 index. All these years of effort for a small advantage over the market, which a cautious investor could have almost achieved in an index fund? he asked.

It’s a fair question, and I’ll give you the same honest answer that I gave in that session. I won’t try to explain that number, but I’ll show you how to read it. The truth is that a single blended figure over nine years hides everything that matters about how an advisory service actually performs.

Let’s start with the most uncomfortable figure. We have made 96 recommendations since we started, and a little under half of those have beaten the market while the rest have not. That’s not a ‘fail’ mark, as it sounds, because of something investors seldom realise.

When a recommendation goes wrong, the most you can lose is what you invested, and in reality you will lose much less. However, when one goes right, then the sky is the limit. So a stock that falls will, at most, cost you a rupee for every rupee invested, but the ones that go right will keep compounding for years and earn many, many rupees for each rupee invested. The sky is the limit.

Therefore, the count of winners vs losers is irrelevant. Of our 96 stocks, 42 have more than doubled, and a handful of those have done the heavy lifting for the whole lot. This is how equity wealth is actually built, by those few holdings you were patient with, not with a huge strike rate.

Now let’s come to the time scales, because the member who complained about our one-year returns being better than our long-term returns had inadvertently pointed out how a true quality portfolio behaves. Over the past year, which was a falling year, as we all know, our recommendations are ahead of the index by about 1 per cent. The thing to note is that this is not brilliance but damage limitation. 

Good businesses fall less in declining markets but also climb more slowly afterwards. In both directions, they are simply less volatile. Therefore, a portfolio of sound investments will always look less impressive at the moment (at any moment) but look impressive over many years.

That brings me to the real explanation for our thin long-term advantage. This is worth paying attention to because it is not a failure. When we started our service, we leaned heavily on blue chips like ITC. Now, in the last four or five years, those stocks have stagnated. They haven’t stopped earning; ITC yielded about 10 per cent when we recommended it. Since then, the earnings have grown better than we expected, and it has given us ITC Hotels shares too.

However, the market has simply lost interest in such companies, mostly because foreign investors have been steadily pulling out of India. This is a cyclical pattern, and when it turns, these names will be at the forefront, but meanwhile they drag on our returns.

So to sum up, here’s the case I’m making. Any advisory service can show you good numbers in good times, but the test of one worth paying for is whether it will stand honestly in front of you and discuss things frankly in bad times. 

On our service, every recommendation that we have ever made is visible in full detail - when we made it, what was the reasoning for the call, plus if and when we reversed our opinion. To track it all honestly, we notionally invest capital of Rs 10 lakh in each pick every Monday, and track everything: dividends, bonuses, splits, etc., to show you the reality.

This honesty and fairness are part of what you are buying for Rs 9,999 a year. We are not here to tell you comfortable stories but true ones and let you judge us on the whole portfolio across a full cycle, which is the only fair way of judging any portfolio.

We would rather tell you the truth, hand you the tools to read it yourself and let you judge us on the whole portfolio across a full cycle, which is the only honest way a service like ours can be judged. 

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