Natural
Gas has emerged as the best performing financial asset of 2016. This has
provided a huge impetus to companies such as Mahanagar Gas Limited (MGL) and
Indraprastha Gas Limited (IGL), both returning 65% and 54% respectively since
July 2016.
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| Source: Yahoo Finance |
However, just because an asset/
sector has outperformed in a particular year is no reason why it will continue
the winning streak. For instance, energy was the best performing sector in 2007
only to crash 39% the very next year. Also lower valuations for the
under-performing asset class will see renewed fund inflows. In 2015 the energy
sector was the worst performing sector only to emerge as the best performing in
2016. It has led the pack after a gap of almost 9 years.
Excepting a few outlier years, sector
returns almost resemble a W with outperformance in one or several years and
then subsequent downturn only to head back up again.
As Benjamin Graham mentions in
Security Analysis, "There are several reasons why we cannot be sure that a
trend of profits shown in the past will continue in the future. In the broad
economic sense, there is the law of diminishing returns and of increasing
competition which must finally flatten out any sharply upward curve of
growth. There is also the flow and ebb of the business cycle, from which
the particular danger arises that the earnings curve will look most impressive
on the very eve of a serious setback."
Further as Warren Buffet mentions, "We are quite content to hold
any security indefinitely, so long as the prospective return on equity capital
of the underlying business is satisfactory, management is competent and honest,
and the market does not overvalue the
business." In other words, when the security has moved ahead of itself
in a very short time it may be time to sell the security.
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