Underperformance is a very negative word and investors hate that with passion. But let me start this blog with some positivity, over the long run you will just do fine investing, at rationale price, in extraordinary businesses. We understand that it is very hard to find extraordinary business at rationale price in Indian market. But this is not complete truth, it is hard to find in any equity markets around the globe. For example, let us take Australian equity market, where there are 1500 businesses listed in the stock market from which 800 businesses not make a single dollar as profits. As shared earlier, there is only one in five businesses which we can grade as quality business in the Australian market, similar to what we had found in the Indian markets.

One of the characteristics of extraordinary business is to retain a meaningful proportion of its profits each year and reinvest those retained profits at attractive rate. Think of a bank account with rupees ten lakh deposited, earning 20% interest and reinvesting the interest each year; in ten years there will be rupees sixty three lakh in the account. Auction this bank in decade time and you will do just fine.

Stock market is like one big auction room, switch it off. Sure, the prices will fluctuate on all the global worries, then whether it is oil price, bank NPA’s, global growth, wars, terrorist attacks to bank interest rate movements in the short term, but in the long run price cannot help but reflect the increase in the worth of the above bank account. And you don’t need any special skills at forecasting the market or the economy either. Feel free, however, don’t trust those forecast, as I am here still waiting to see someone rationale person to claim he can predict market movements with 100% surety.

So why am I telling you this? Because I need to remember it myself. The investing strategy that I am talking about above and the one we ask you to follow goes through periods of underperformance – a word I hate. It means the broader index is outperforming my portfolio. And it also means someone in the market who could have closed his eyes, bought the stock market index – with all the rubbish companies and done better than a team of professional, hardworking analysts.

Worse still, it gives ammunition to all the other blind folded clowns in the market, to start to recommend others too, to close your eyes and buy index, it works. The artificial list of big but not good companies that aren’t growing and burning hard earned cash of shareholders. They ask you to ignore all the facts but have faith that share prices will just go up.

Let us take a step back, and look at the share prices of companies like Reliance, Bharti Airtel and SBI today are trading either at same price or below the 2011 price factoring the splits. Five years of no capital appreciation! What about the claims and so called free and sensible advice that floats in the media and newspapers and blogs that stock market always goes up and invest for the long term. The longer you remain invested in mediocre business, the more likely your purchasing power is going to be eroded.

Over the past 12 months, NIFTY 50 is still down about 7%, even after rising 13% from its February 2016 lows. The recent strength, however, is due to rally in materials (commodity stocks) up by double digits in weeks’ time. Iron ore prices have jumped to $69 from its $37 a tonne lows in the December 2015 quarter.

We did missed out that rally and we wonder should we have positioned our portfolio a bit different. The answer, however, does not lies in the recent stock price rally but in the long term economic performance of business in the sector that we missed out.

Short term underperformance makes a fund manager look bad compared with the index. But one needs to understand that this underperformance is inevitable because the prices of good companies don’t always go up and the rubbish that I don’t own occasionally does. And rather than asking question whether commodity prices will reverse or will there be good monsoon this year, I just ask: are we invested in high quality businesses? If the answer is yes, we should be happy when the price of great quality businesses underperform because it represents opportunity rather than risk.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.