Why "Brilliant" Equity Analysts Hate This Brainless Strategy

[00:00:00]Hello everyone, Rahul Shay here trying to make investing accessible and profitable for the average investor.

[00:00:06]The ultimate goal of all equity research boils down to just one thing. You want to find a stock's intrinsic value. Then you buy it at a massive discount.

[00:00:16]Investors spend countless hours pouring over financial models. They project future earnings. They track macro trends. They analyze management. They do all this just to find a small edge.

[00:00:31]But what if I told you there is a strategy that ignores all that complexity?

[00:00:36]What if you could track just one single parameter and absolutely crush the market?

[00:00:42]Look at the data. Over a recent six-year period, the benchmark index turned your money into 2.1x.

[00:00:51]But this one-step method multiplied wealth by a massive 6.6x. 6x.

[00:00:57]Today we break down exactly what that parameter is. We will look at how it works and how you can use it.

[00:01:07]Now the magic metric is price to book value. Specifically, we looking for stocks trading below their book value.

[00:01:15]To make this work, I put together a portfolio of 30 micro cap stocks. Why 30? Because micro caps are a high-risk space, you need broad diversification.

[00:01:28]You want to avoid the risk of a few bad apples blowing up your entire portfolio.

[00:01:35]But why micro caps in the first place?

[00:01:38]Because that is where market inefficiency is highest. Big institutional investors ignore them.

[00:01:45]However, these companies are not so small as to make investing impossible.

[00:01:51]So let me define my universe. Think of the stock market ranked by size. The first 100 stocks are large caps. The next 150 are midcaps. The next 500 are small caps. That is 750 stocks in total.

[00:02:08]Our strategy looks at the next 500 stocks after that top 750.

[00:02:15]This is our micro cap playground.

[00:02:18]Now within this universe we buy stocks with a price to book value between.3 times and8 times. Why this specific band? We cap it at8 times because we want a margin of safety of at least 20%.

[00:02:35]We set a floor of.3 times because stocks trading cheaper than that are often value traps. They are cheap for a terrible reason.

[00:02:45]The strategy is simple. We buy 30 equal weighted stocks that fit these rules. We hold them for one year. At the end of the year, we sell everything. We reset, find a new batch of 30 stocks, and rebalance.

[00:03:04]Let's look at the results. First, let's take the six-year period between December 2019 and December 25. The strategy multiplied the initial corus by an impressive 6.6 six times. That's a stunning 37% CAGGR.

[00:03:22]How did the benchmarks do? The senses delivered 2.1x returns, which is a 13% CAGGR. The BAC small cap index did better, delivering 3.8x returns.

[00:03:36]But our simple strategy beat them both by a wide margin.

[00:03:41]This is a great example of how simple beats complex. The logic is rock solid.

[00:03:47]We are buying a 100 rupee note for 80 rupees or less. Plus, we spread our bets across 30 stocks. These are beaten down companies. The downside is limited, but the upside is huge on any positive news.

[00:04:05]Now, you might argue that 2019 to 2025 was a massive bull market for small companies. The BAC small cap index itself was up around four times. So, does this strategy work when small caps have a modest run?

[00:04:22]Well, let's check the previous six-year period. We will look at December 2013 to December 2019.

[00:04:31]Now, the overall returns here were very modest. Yet, the strategy still outperformed. It returned 2.4x, which is a 16% CAGGR. Meanwhile, the Sensex gave 1.9 times and the BAC small cap index gave around similar range.

[00:04:52]So look at the entire 12-ear journey from 2013 to 2025. The strategy turned your money into almost 16 times. That's a 26% CAGGR. Over the same 12 years, the Sensex gave just 4x and the BAC small cap index gave 8x.

[00:05:12]This is classic value investing. Be fearful when others are greedy. Be greedy when others are fearful. When a stock trades below book value, investors are too fearful.

[00:05:25]That is our cue to turn greedy. We use a framework that minimizes downside and maximizes upside.

[00:05:34]Now notice one vital thing. I did not look at any other factor. No debt ratios, no profit growth tracking, just one parameter used with strict discipline.

[00:05:47]But I must be honest with you, no strategy is a magic wand. Every great strategy demands an emotional prize.

[00:05:57]Let's talk about the bad times. In 2018 and 2019, this strategy suffered badly.

[00:06:03]It was down almost 40% two years in a row. So combined, the portfolio lost more than 60% of its value in just 24 months.

[00:06:15]A crash of that size hurts. It can shake the confidence of even the most experienced investor.

[00:06:23]Many people would abandon the strategy right there, but that would be a mistake because the strategy recovered and multiplied seven times over the next 6 years. So, discipline is key.

[00:06:38]But what if losing 60% of your portfolio makes you lose sleep? What if it is simply not your cup of tea?

[00:06:47]Well, you can still use the strategy.

[00:06:49]You just need to introduce a safety buffer. You can use an asset allocation variation.

[00:06:58]So consider the 7525 variation. You put 75% of your money into this strategy and you keep 25% in safe bonds or fixed deposits earning 5% to 6% per year. Or you can go with the 50/50 variation.

[00:07:14]Half your money goes to the stocks and half goes to fixed income. You reset this balance at the start of every year because a large chunk of your money sits safely in bonds. A 2018 style crash will not hurt as much. Your portfolio's volatility drops drastically.

[00:07:35]Naturally, you sacrifice some returns for this peace of mind. Let us look at the 12-ear number for these variations.

[00:07:42]A 7525 portfolio brings your total 12-year return down from 16x to 12x.

[00:07:50]But remember, that is still way better than the 4x earned by the Sensex.

[00:07:57]The 50/50 portfolio brings your total return down to 7.5x.

[00:08:02]This still beats the Sensex comfortably.

[00:08:05]It falls just short of the BAC small cap index's 8x return. But your ride would have been incredibly smooth.

[00:08:15]So at the end of the day, this technique is powerful. It is deeply logical. Most importantly, it gives you market bidding performance over the long term.

[00:08:27]You do not need to over complicate your investing. You just need a sound principle, a diversified basket, and the discipline to stick with it through the rough patches.

[00:08:39]If you want to see how I filter these stocks or want more deep dives into simple wealth buildinging strategies, hit that subscribe button.

[00:08:49]Also, let me know in the comments below.

[00:08:51]Would you have the stomach to hold a strategy that dropped 60% before giving you a 16x return? That's all from me today. I'll see you in the next video.

[00:09:00]Goodbye and happy investing.