Reliance is India’s number one company by market capitalisation. Millions of people had invested in this business from almost 4 decades and have made decent money.

But four years back when world had to face financial crisis, suddenly a very lucrative business started loosing its charm or in other words its competitive advantage. When competitive advantage starts fading it directly impacts its earnings. Have a look at the table below:

Reliance Ind

Year 2009

Year 2010

Year 2011

Year 2012

Net Profits

Rs 14,950

Rs 24,424

Rs 19,272

Rs 19,717

Growth %

-23%

63%

-21%

2%

ROE %

14%

19%

13%

12%

For last two years this business had not seen any earnings growth and many analysts on the street do not expect their earnings to be positive for the year end 2013.

They all celebrated when Reliance came out with their second quarter result which demonstrated -6% growth in their earnings and defended saying the price of stock is undervalued. What do you think? What are you doing with this business? Buying or selling?

Investors who had invested in this business for last 4 years had earned 23% which reflects compounded returns of 5.25% per year. If I go further, investors who are invested in this business for last two years are still recouping their capital losses of -23%.

Capital preservation should be the top most priority of every investor. In last 4 years you would have been better off investing your capital in any banks fixed deposits and would have made better returns then what Reliance had offered you.

The best way to preserve your capital is to buy stocks when they are trading at cheap price to its intrinsic value calculated rationally. Be wise with your money and before buying any stocks do the due diligence as if you are buying a business. And we mean it!!