Sunday, June 30, 2013

Stock Markets are not for everyone- Small boys have to stay away

Keeping one’s faith in equities as an asset class is perhaps very tough. With the markets virtually panicking and not going anywhere except down, people seem to be deserting equities. The investor who has started investing within the last decade, has made money in real estate and gold and not done very well in equities. Equity returns are a function of three things- Patience, effort and a bit of luck. Patience is important because equity returns tend to be extremely volatile in the short term. Over longer term, I can expect share prices to reflect the underlying company performance. Effort is required in identifying the share/s. Here it is important to distinguish between a range of characteristics that include longevity of the business, the profitability, the promoters and the nature of the business. In India we clearly see that given the growing aspirations, those companies that make and supply consumer products (especially the FMCG) are best positioned. There are services sector that grow, but are subject to intense competition as well as regulatory issues. The manufacturing and infrastructure sectors are reflective of the state of the economy and are characterised by hope and despair. So when constructing a portfolio, it is important to understand what we are buying and what kind of volatility are we going to be subjected to solely on account of company performance. We may not be able to protect ourselves against market forces but surely we can try our best to protect ourselves against the quality we pick. This effort is something people shy away from. Assuming that we are not comfortable with numbers and its analyses, surely we can spend some time in understanding the business of the company? So maybe we end up with a handful of companies we understand in terms of their longevity. Once we reach that stage, our next effort is to protect ourselves against market forces. This is best done by adopting a SIP route for the individual stock that we like. We keep buying a few shares every month for ten to twenty years. Where we all err is in buying in bulk simply because we see others making quick money. No one tells you about the losses. Investing in equities is successful only when you buy what you like at a price that you think is right. There should be no compulsion for an individual to be fully invested. Then we become like the fund manager who says that he will be fully invested even if he knows that the markets are expensive. An individual investor has an edge, if he does his homework. Luck is a factor that we cannot ignore. If we started our investment habit in 1995 or 1996, we have made money. If we started in 2000 or 2008 we have lost money. Timing does make a difference, if we are not a regular investor through an SIP route. We also need luck to make sure that the company we choose is not hit by fraud. We try and minimise it by knowing about the promoters, but there are no guarantees on that. We see a range of mutual funds with similar objectives, but the returns vary very widely. Again, we should be lucky to choose the winner because historical records seldom sustain. Warren Buffet famously states that he likes to ‘own’ businesses that are first class and will do well over time, feeding on growing needs of the consumer. He also wants the business to be easy to understand. He also says that if it is not possible to buy entire businesses, he would like to be part of that by owning shares. That is what we are doing when we buy shares. We are letting our money ride on someone’s ability to manage a business well. The fly in the ointment is that the price of the share is subject to so many market forces. As an investor, we have two options to get in. One is by adopting the SIP route for a period of ten to fifteen years. The other is to be number savvy and wait for timing when the share price is really attractive or below what an analyst would call as ‘fair value’. Essentially what it means is that at this point you expect the reward (of higher prices) to outweigh the risk (of fall in prices). The worst is to time investments with market sentiments. That way, only losses accrue to you. R. Balakrishnan ( 24th June 2013


Anil Agashe said...

Valuable lessons for new investors.

Unknown said...

Enjoyed reading it sir.

More than anything else, it is the temperament that separates the men from the boys.


Meenakshi Pai said...

Loved the way been posted.SIP on well understood share/s is indeed make sense.Thanks!!!!

sneha singh said...

It's a new reality or a false reality. There is no such age that in sudden age you will get succeed in stock market or may fail. But when you are investing, invest as you are 10 years older then what you are.