High Quality vs. Low Price..?

*High Quality Vs Low Price*

*If you pay peanuts, you get monkeys. ~ Old adage*

*If you remember the stock market crash of 2008, you also remember that it spared almost no stock. Companies, even the well-managed ones, lost half or more of their market capitalization in few months.*

As an example, *Pidilite* (makers of Fevicol), which was one of those extremely well-managed businesses then, lost 55% between December 2007 (just before the crash started) and March 2009 (the bottom). *Titan and HDFC Bank,* two other stalwarts, lost 50% each. In short, the crash was like a bad dream for people even in these marquee stocks.

But for those who held on to their nerves, and to these stocks, the next decade was about to turn into a beautiful dream.

As an example, assume you were owning Pidilite near its peak in December 2007 and went into a deep sleep that continued till today (June 2018). Your return from the stock would have been around 1,000% (CAGR of 26%) over this decade!

Also assume you had Titan and HDFC Bank in your portfolio then (remember, you slept for the next 10 years thus didn’t do anything with these stocks), CAGR return from these would have been 26% and 19% respectively till date.

Not bad, right? 20% CAGR over 10 years is 6-times your money. 25% CAGR over 10 years is more than 9-times your money. Plus, you made this kind of money while sleeping, and that too from the peak before a major market crash!

Wait, I forgot to add that you woke up for a bathroom break in March 2009 and realized that a few companies you did not own had fallen by 80-90% in the previous fifteen months. You were too sleepy to look at your portfolio and asked your spouse to buy a few of these new, terribly depressed stocks as you went back to sleep.

*One of the stocks was Unitech, which your spouse bought in March 2009 after it had already fallen 95% since December 2007. She also bought large chunks of Suzlon and Jaiprakash Associates in your portfolio. After all, these were down around 85% from their peaks and thus appeared cheap.*

Your spouse also slept after placing these orders for you and with the excitement of giving you the great news of buying these stocks at throwaway prices, when you woke up.

But that was not to happen. When you both woke up in June 2018, Unitech was down another 85% from your spouse’s buying prices, and Suzlon and Jaiprakash Associates were down another 85% and 70% respectively.

You were in a state of shock, as you thought you had bought these stocks cheap in March 2009. What could have gone wrong?

You also realized that a few stocks that you were owning before the crash started, like Pidilite, Titan, and HDFC Bank, had turned up 1000%, 1100%, and 500% respectively! What could have gone right?

*Well, the answer to both these questions is the same – it’s the business, stupid!*