In mid-1993, near the bottom of India’s worst bear market, a small IT company listed on the BSE at Rs 145. This was at substantial premium on its devolved issue price of Rs 95. Infosys would turn out to be one of the biggest wealth creators India has ever seen. We have compared returns since its listing with that of its peer Wipro, a company of similar size, and that of three corporate stalwarts that dominated the Sensex in June 1993.
Each one of this quintet has delivered outstanding returns in the past 13 years. Infosys has offered an astounding 82% compounded to IPO investors, way above that of Wipro with its impressive 67% and of ITC with its excellent 44%. Reliance Industries and Telco have also comfortably beaten the Nifty. Elsewhere in this issue (see How to Bet Safely on 2011, page 20), we have talked about index investing and the returns it safely fetches. So here, with the indices nudging all time highs, let’s focus on how to find a stock that beats indices hollow.
What would it have taken to find Infosys (or Wipro or ITC) in 1993? The first requirement was a risk appetite. Infosys was a small, newly-listed company in a new business segment. Wipro was also risky - it was an oil-miller and electric bulb-manufacturer in the process of transforming itself into an IT business. Even ITC was more risky than other Sensex stocks. It was contesting a huge excise case and fighting off a takeover bid. So a high risk-appetite was necessary but would it have been enough? No! You may have bought DSQ (and lost 99%) or Himachal Futuristic (which lost 98%) instead of Infosys and Wipro if you were simply blindly targeting small IT stocks.
We are talking about Infosys precisely because it has been an investors’ darling. And, we are comparing it to RIL, ITC, Wipro and Telco precisely because these have also given excellent returns. Economists and medical researchers call this “survival bias”. Doctors know that it’s easy to receive a distorted impression of a drug if we only study the survivors of a disease. In this case, by focussing on a few winners and ignoring the many failures, we may receive a distorted view of market risks. It is against the odds. But finding one Infosys in your lifetime will amply compensate even if you fall for half-a-dozen DSQs. And that is the lure of active investing.