We have two questions for you:
- How many companies do you know which have grown multifold despite the bear markets or in not-so-great economic conditions?
- How many companies do you know that have eroded investor’s wealth despite witnessing multi-year bull markets?
You might have your answers ready. But if we were to do some homework around these questions, then that leads us to another important question:
Does a Bull Market or a Bear Market really matter for good businesses run by competent management? By a good business we mean those companies which have a loyal customer base, consistent demand for their goods, have low or zero debt and generate consistent profits.
Well, we don’t think so.
Good businesses will do well irrespective of the market conditions they are operating in. Yes, even their share prices would witness a correction due to overall market correction but will easily recover the moment the tide changes. On the contrary, bad businesses will find ways to screw themselves up irrespective of the type of market and business conditions they are facing.
Shares of good businesses will become wealth creators in the long run. On the other hand, shares of bad businesses will become wealth eroders eventually if not immediately.
But why are even talking about wealth eroders now?
After all, the markets these days are regularly making new highs. So shouldn’t we be focusing only on wealth creators instead?
Agreed. But as advisors and partners in our clients’ wealth creation journey, we believe that we should be highlighting both sides of the story.
One can find wealth creators only when one is able to avoid wealth eroders. Isn’t it?
So our focus is no doubt on wealth creators. But we also ensure that we stop wealth destroyers from entering our portfolio. And hence the vigil to protect ourselves from such wealth eroders.
To invest successfully, one needs to find fundamentally strong businesses run by smart and efficient management and then invest in such businesses at reasonable valuations for long term.
And as we shared our view earlier, a bull market or a bear market doesn’t really have a large impact on the performance of well-run businesses. In fact, there are companies that have grown multiple times even in bear markets.
But first, let’s have a look at some real-life examples of wealth destroyers:
Then there were Suzlon (down 96%), DLF (down 85%), Indiabulls Real Estates (down 75% since 2008) and hundreds of more examples and thousands of sad investors for each such example.
What’s worth noting is that these companies have done poorly in spite of a good run in markets in years after 2008-2009. So what went wrong for these companies?
There were several reasons - at times different for each.
Some had too much debt, while others had unreasonable growth ambitions. Some didn’t run their operations well while others had complex corporate structures siphoning money out of the company illegally. At times, it was not about the company and rather about being caught unprepared in the wrong part of the business cycle.
To summarize, all these companies were facing some or the other kind of fundamental problem with their businesses or its environment. They could not cope up with these issues and result is there for everyone to see.
Strong companies, on the other hand ran like well-oiled machines.
Backed by good decision-making by the management, these went on to deliver eye-popping returns for their shareholders. Here are some solid examples of wealth creators over the years:
The figures in last column (Wealth creation in %) are eye-popping!
And this is exactly what happens when investment is made in good businesses and ridden through both bear and bull markets.
For more examples of such super wealth creators, have a look at our detailed study on how fundamentally sound businesses delivered 20, 50 and even 100 times returns just after few years of the crisis.
In almost all the cases of wealth creators, what mattered most was that the fundamental prospects of the company were good; the growth was consistent and visible; and most importantly, management’s approach was rational, growth-centric without being unreasonable. And as you might have guessed by now, most of these factors were missing in wealth eroders’ story.
In fact it would be safe to say that for every 1 real multibagger stock, there would be several wealth eroders in the market.
This is the reason why being in the right stock as well as avoiding the really bad ones is so important.
People who ignore fundamentals and invest based on tips and without proper research are the usual casualties of wealth eroding stocks.
To avoid such outcomes, there is a need to properly study businesses before investing and also be on a lookout for signs that could raise red flags. Failing to exit a stock at the right time is also a problem for common investors. They hold out to the hope that things would get better one day. But in many cases, things keep getting worse until the time the damage has become irreversible.
Finding correct stocks is necessary to create real wealth. It’s not easy but that is what is needed. There cannot be any denying to that fact.
To be fair, it is not always possible to identify wealth destroyers early on. But to have some success in doing so, what we need is sound financial understanding, proper research and experience in various market cycles.
If you as an investor do not have such expertise, then it’s worth considering taking help of those who have it and can help you. There is no glory in being wrong on your own in stock markets. You will miss out on the wealth creation opportunities that are available for smart investors.
So better to take the right advice, be right and make money instead. Isn't it?