In our last few posts we have discussed about India’s fastest and most consistent wealth creators in last decade. In today’s post we back test stock predictions made by Motilal Oswal annual wealth studies.

I have picked years  2006 -10 for our analysis so that we can have at least 3 years of stock performance data available for latest predictions. In addition to this for the sake of consistency I have kept Nifty and CNX Nifty midcap as a benchmark indexes to compare performances for all stock predictions.  Each year the studies had a value investing theme simplified into a mathematical model to identify prospective investments. Lets look at those predictions and how have they fared over years.

 2006 – The value investing theme was favorable terms of trade, the study states that a company enjoys favourable ”terms of trade” if its debtors are lower than its creditors. So favorable terms of trade could result in zero or even negative working capital. Whereas adverse terms of trade could mean very high working capital requirements, making the business unprofitable.

The above explanation was converted into a mathematical model and three stocks were identified with favorable terms of trade- HPCL, JSW Steel, IPCL. This is how they have fared till 01.01.2014 all figures in percentage.

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Two of three stocks have beaten benchmark (Nifty and Nifty Midcap index) with JSW steel doing very well. However HPCL took quite a beating with investors losing over 70 per cent of their invested amount.

2008 – The value investing theme was borrowed from great investor Warren buffet’s take on great, good and gruesome companies. The study defined a truly great company as one having an “enduring moat” (i.e. long-term competitive advantage) that protects excellent returns on invested capital, this can be possible when

1. It must be either a low-cost producer, or

2. It possesses powerful brand(s) or both

The above definition of a great company was put in a mathematical model and following were identified as potentially great companies – Asian Paints, Container Corpn, Dabur India, GlaxoSmith Pharma, Hero Honda Motor, Hind. Unilever, Infosys Tech, ITC, Nestle India, NMDC Ltd, Satyam Computer, Sun Pharma and Wipro. Although they were not proposed to be bought but we still put this list of great companies to our performance test. This is how they have fared till 01.01.2014 all figures in percentage

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Fantastic results only 2 out of 13 were not able to beat benchmark indices. Some of them had humongous out performance like Container corp which was up 600% from 2008 prices. Does this mean we go out and buy these companies – NO. Identifying and buying are two separate steps  of investment but we can be rest assured that putting money in these companies during recessionary periods will bring good fortune to investors.

2009 – The investing theme was winner category + category winners, Lets us take some time to understand what it meant

  1. Winner category were identified as industries where maximum scalable potential was foreseen to capitalize on India’s next trillion dollar economic opportunity
  2. Among Winner category there would be companies which would have great management and entry barriers to becomes winning companies
  3. And finally among winning companies there would be some which are available at reasonable valuation. They will become winning investment

Blank PageThe above explanation for winning investments was also put in a mathematical model and following stocks were identified that would be potential winning investments –  B H E L ,Bharti Airtel, CRISIL, Dabur India, H D F C, HDFC Bank, Hero Honda Motor Larsen & Toubro, Mahindra & Mahindra, Maruti Suzuki, Mundra Port Nestle India, Pantaloon Retail, State Bank of India, Sun TV. This is how they have fared till 01.01.2014 all figures in percentage

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Here we have 7 out of 15 stocks that have not beaten benchmark returns (Nifty and Nifty Midcap index), so some of the identified winners eventually were not recognized by Mr. Market and produced abysmal returns.

2010 – The investing theme was creating wealth from unknown & unknowable the study defined UU investing as the process of “identifying good investments when the level of uncertainty is well beyond that considered in traditional models of finance” There was no clear cut stock predictions however the study predicted omega returns for Yes bank till 2020, Let see how this stock has performed till date

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The stock did outperform the benchmark indices handsomely generating good returns for investors


-Studying these four annual studies confirmed that sound investing principles can be translated into mathematical models to come up with a list of potential investments. I sincerely thank Ramdeo Agarwal to publish these annual studies.

– Looking at performance test we have to admit pure historical numbers can never give you sure shot multi baggers however it can really  help you shortlist candidates to reasonable numbers to do further analysis. After all if numbers could have predicted winning stocks than there would be more buffets & lynchs out there.

Moneycontrol charts used for creating this post are available here to download.

What’s your method to pick a stock to invest? leave a reply or share in comments at our Facebook page, I would love to hear from you

NB – In 2007 there was no stock prediction that was able to be identify.


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