Active Investing & Infosys in the year 1994

My own observations over the years are summarized below:

–>It is not possible to identify multi baggers in advance.

–> Investors can identify themes and invest prudently in shares of such theme businesses. Here also, there will be significant danger of the theme falling apart. Therefore, prudent investing requires investing only small portions of the capital in any given theme. These theme stocks will not be multibaggers. The expectation is that they will be market outperformers. Examples of such themes have been: PSU Banks, Mid Cap IT, Large Cap Pharma. Themes that may emerge in the coming months include Capital Goods, Mid Cap Pharma.
All such themes require an exit strategy. Investors cannot buy and forget.
Such investments are in fact Position Trades.

–> To obtain gains from the market, the wise course of action is to invest in Index Funds. Investors who buy Nifty, Bank Nifty and CNX IT through Index Mutual Funds are likely to get a significant advantage over investors who try to buy individual stocks.

–> Investors should consider trading in stocks and investing in index funds

Infosys in the year 1994

A favorite example given by colleagues from the fundamental analysis area is Infosys. They tell us – “if you had bought Infosys in 1994, see how much you would have gained! This is the reason you should always stay invested in stocks”.

I have many problems with this analysis.

–> This statement assumes Investors ‘knew’ in 1994 that Infosys will become a multi bagger.

–> For One Infosys that became a multi bagger there were 500 stocks that did nothing or even vanished. Given to choose between 501 stocks to invest, Investors would discard 500 and select the only one that moved up.

–> The analysis is history. Suppose you did not buy Infosys in 1994. Now what? Does this mean this one mistake has closed all doors for investing in the future?

–> Together with Infosys, there were many other IT stocks that promised a great future. Two of these were Pentamedia(delisted, share price became almost zero) and Satyam (share price is much lower than original investment). What was the reason to choose Infosys and not satyam?

–> The key question is: what should the investor do now. This question remains unanswered except for a general idea to remain invested in stocks.

–> Not all stocks give returns. Even top quality stocks can remain flat for years. Hindalco was 110 in 1994, still is 110 after 18  years. (Prices are adjusted for bonus etc,.. We are comparing apples with apples). Hind Unilever remained in a trading range for 10 years. How can the investor say: this is a good quality stock but it is not going to go anywhere, while this will be a multibagger.

–> It assumes that multi baggers can be forecast in advance.
–> It also implies that the listener is probably a fool if he did not identify multi baggers and buy them. Well, I must be a fool, then.
Reader comments are welcome. This is the first part of my views on investing. A second, concluding part will follow.