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The art of comparison

The art of comparison

Moving up the learning curve, Kamya Jaiswal selects a benchmark to evaluate the growth of her portfolio.

23rd January
How do I know that my portfolio is performing well? It is not the most relevant question just four days after I have invested my entire corpus. However, I want to start exploring the options early for it may take a long time to choose a reasonably accurate method of evaluation.

For inputs, I turned to my friend, philosopher and guide, Google. The first takeaway: to measure, I must compare. It seemed so simple that I thought I had taken my addiction too far; you don't need a search engine to tell you this. Then I realised the catch: with what should I compare my portfolio? The search engine had many ideas: a sector, index, closest competitors, etc. I should have known; nothing is simple about equity investment.

28th January
They (read, experts) have a specific term for comparing performance: benchmarking. The standard with which you compare a stock is called a benchmark. Belying its definition, this standard is not fixed, and you have to choose an appropriate benchmark. If one isn't available, you have to create it. Also, you must decide on the parameters for comparing performance (like PE ratios or EPS) with the benchmark. It took two hours of painful research to learn all this. By the way, ever since I have invested in stocks on my own, my RM has been avoiding my calls. Since when did RMs start developing egos?

Here's how I decided to grapple with benchmarking. The third quarter results have started trickling in and I want to compare how my steel stocks, Tata Steel and SAIL, have performed vis-a-vis the steel index. Only to discover that there is no such thing as a steel index. Professor Calculus offered what seemed like his first feasible suggestion: compare the stocks with the metal index. But the index includes companies like Nalco and Gujarat NRE Coke. These don't even belong to the steel sector. The professor was offended. "Why don't you average out the PEs of all companies in the steel sector and then compare them," he said smugly. The sector has about 110 companies and my list is not comprehensive. I conceded—it would be one arduous task.

But soon I had an opportunity to get back at him. What about Hotel Leela Venture? There is no index that includes the stocks of the hospitality industry. With what do I benchmark it, if not the industry average? For once, he was flummoxed.

The third quarter corporate results confirmed that India is back on the growth track as revenues of the auto and IT sectors have increased. However, the banking and engineering sectors did not perform as well.
The third quarter corporate results confirmed that India is back on the growth track as revenues of the auto and IT sectors have increased. However, the banking and engineering sectors did not perform as well.
5th February
Greece, Portugal and Spain are reeling under debt, and the markets worldwide are in a blue funk. Combined with the crash in energy and commodities prices, this has been pulling the markets down for almost a fortnight. Today, the Sensex closed below 16,000—at 15,790. Experts think it is discouraging for investors if the index drops below 'psychological milestones' such as 16,000. This sounds suspiciously like the warped logic of pricing something at Rs 99 or Rs 89. Most importantly, in the past 15 days, the market has lost 9.6 per cent.

The other important news is that I am even more confused about benchmarking. Using indices that are not exclusive to a sector is dicey. It seems that a comparison with pure breed indices can also be confusing, especially if you do not draw the right inference from the comparison. So if the Bankex is down, I must ask myself: 'Should I invest in the banking sector?' If Axis Bank has performed worse than the Bankex, I should ask: 'Should I opt for some other bank within this sector?' Understanding how to use data comparisons is crucial for correct results.

10th February
Five days of research have thrown up an interesting idea. Instead of comparing each stock to its respective sector, I can benchmark my portfolio to an index like the Sensex. After all, even the Sensex comprises stocks from various sectors like my portfolio, so the comparison will have common ground. Also, I can compare the weightage of the sectors in my portfolio with those in the Sensex on, say, a quarterly basis. I can also benchmark my portfolio against an ace equity mutual fund. If it does not come even close to the returns of the fund in a year or so, it will mean I should quit stockpicking, divert the money to the fund and sleep easy. No, this wouldn't mean my project has failed. By that time, I would have learnt what I wanted to about the markets.

19th February
Last week's morbid apprehension has been effectively banished. I was checking the performance of my stocks in the third quarter. Seven of the 10 stocks have registered growth in net profits and higher earnings per share (EPS). Some like HPCL came out of the red, while others like Lupin doubled their EPS. Britannia was a disappointment as it bucked the trend of good performance by FMCG companies—its EPS almost halved from 24.73 in the second quarter to 12.18 between September and December 2009. I don't think Britannia's brand appeal has taken a hit, despite the local upstarts. I will have to follow up on this later. The other two dampeners were Tata Steel and HCL, though their growth hasn't shrunk alarmingly. For now, I refuse to be worried. It's time to bask in the success of my stock picks and hope that they stay on the growth track. Maybe I should celebrate with a chocolate dessert. The magazine is going to press; it will be a long night anyway.