Hope reigns

A recent National Bureau of Economic Research working paper highlighted what has always been popular belief. In their paper titled Buffett’s Alpha, Andrea Frazzini, David Kabiller and Lasse H Pedersen write, “Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshire’s portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management.” 

As proof, the paper states that Berkshire Hathaway has a Sharpe ratio of 0.76, higher than any other stock or mutual fund with a history of more than 30 years. The Sharpe ratio, which owes its origin to Nobel laureate William Sharpe, denotes whether the return generated is through thoughtful stock picking or reckless risk taking. A consistently high Sharpe ratio, in fact, separates the professionals from the swing-at-everything amateurs. While Warren Buffett’s sheer mastery at hitting home runs is intimidating, it is apparently not enough to dissuade smaller fry from trying to pick multi-baggers. Our second annual edition of ‘My best pick’ keeps that tradition alive. 

2013 has been a yo-yo year for Indian investors, with sentiment swinging from fear to hope. The benchmark Sensex is up 10% year-till-date, but much of that gain has come over the past two months on renewed hope. Investors are bullish about the National Democratic Alliance returning to power and cranking up the stalled economic growth engine. The other big expectation, of course, is that even if the Federal Reserve acts in a miserly manner, the Bank of Japan and the European Central Bank will keep their spigots open.

Keeping in mind the possible economic recovery, many analysts believe that the financial services industry is headed for good times. That is why, even in this edition’s best picks, there are six companies from the financial services space. Whether all this hope comes to fruition will be clear in the months to come. We pray that it does.