“For a lot of investors, Mr. Market is that illusive entity whom we are all distantly acquainted with but know very little about. So, who is Mr. Market, and what is his role in the investment world?


Benjamin Graham invented the concept of Mr. MarketAccording to him, Mr. Market is the personification of the whole stock market. He comes to you as an individual investor on a daily basis and offers to buy or sell stocks at his quoted prices. The job of an investor, according to Graham, is to take advantage of Mr. Market. When it comes to investing in stocks, the investor should buy shares when their prices being quoted by Mr. Market are lower than their intrinsic value and sell the shares when Mr. Market quotes prices higher than their intrinsic value.

Currently, the PE ratio of Nifty 500 is 26.9 and the PBV ratio is 2.6. However, even more, interesting is the fact that the PE ratio of our multi-cap investment portfolio, Scientific Alpha XLNT 25 is 10.1, and its PBV is 2.0. The Nifty 500 is market-cap weighted; and hence, its ratios are dominated by the larger-cap stocks, even though it represents the top 500 stocks in the Indian markets. But the multi-cap portfolio is a set of 25 best stocks according to the Scientific Alpha Investment Engine from the whole pool of stocks with market capitalization larger than INR 1000 crores. This set of stocks is available at much lower valuation ratios as compared to the Nifty 500.

Further, let us compare the fundamentals of the market (Nifty 500) with our multi-cap portfolio (Scientific Alpha XLNT25). The RoE of the market is 9.7%, while the RoE of the multi-cap portfolio is 19.4%. The multi-cap portfolio companies are compounding the shareholder’s capital at twice the rate as compared to the companies in the market portfolio. This is further reinforced when comparing the RoCE data. The market RoCE is 10.3%, while the multi-cap RoCE is 25.4%.

Similarly, the typical market company has a high debt of 70% of the equity capital (net of cash), while the multi-cap portfolio company has 30% net cash on paper..

Further, the multi-cap portfolio sports a dividend yield of 2.8%, which is twice the market’s 1.4%. Thus, it is evident that the investment returns of the multi-cap portfolio are also multi-fold, which makes this strategy a very relevant one while investing in stocks for the long term.

One can easily conclude that the multi-cap portfolio is a SuperNormal Portfolio of SuperNormal Companies at SuperNormal Prices. Does it make sense to do the trade with Mr. Market? This is why reputed investment advisors advocate an in-depth understanding of Graham’s concept of ‘Mr. Right’ and a consideration of the multi-cap portfolio avenue while deciding on how to start investing in securities in India.

Let us conclude with Sir John Templeton’s quote:
“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.”

If you would like to know more about creating SuperNormal Portfolio write us at [email protected]

Disclaimer:

Past performance is not necessarily indicative of future results.

Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.