Our thought process and approach on few important aspects of investing ..
Valuation is probably the single biggest factor affecting the returns. Future returns from an investment have a very high correlation with the starting valuation. Applicable for both individual stocks and market indices.
The implication for managing the portfolio is as follows –
- Stock market returns are a function of PE multiple (Expansion or Contraction) and Earnings growth or degrowth.
- PE multiple is both a qualitative and quantitive factor.
- Earnings Growth is a function of management quality, broader economic growth and other macroeconomic factors.
- If you are entering the markets at a low valuation then the portfolio can enjoy the tailwinds of both PE multiple expansion and Earnings growth.
- If you are buying the markets at higher valuation then the scope of PE expansion is limited and the stocks are more or less priced to perfection. A small disappointment on the earnings can lead to a larger downtrend in prices.
Discovering Multi baggers is not the only Holy Grail
India is expected to grow at a nominal GDP of 11% to 14% every year in the next decade. Being a developing country, the opportunity size for most of the listed companies is very large. Riding the existing Multi bagger stocks with good risk control often can also result in exceptional gains over time.
It works because of herd mentality and Recency bias. We will show how to play it.
We prefer to buy stocks on a DIP
Consequently, the recommendations will come as a bunch. When markets are correcting in a bull market, within a very short span of time (5 to 10 days) we may recommend five to ten stocks for buying but when markets are popping out we may concentrate more on profit booking rather than giving fresh buy ideas. Warren Buffett once said that as an investor it is wise to be “Fearful when others are greedy and greedy when others are fearful.” We will show how it’s done.
Do you know?
Analyzing data for Berkshire from 1980 to 2006, Hughes, Liu and Zhang concluded that –
- The median holding period for Buffet over this period was one year.
- 30% of stocks were sold within six months of purchase.
- Only 20% were held for more than two years.
The financial media and the twitterati will make you believe that Buffett holds everything for decades. But for him, the holding period is a function of validation of the original investment thesis on a Quarter on Quarter basis for as long as it holds true.
Data analysis on 6000 stocks listed on NSE/BSE supports the conclusion that holding anything will not make you rich. Only holding the right company will. You have to be opportunistic and open-minded, it’s all about optimizing the capital allocation.
Strongest Sector Bets
Broadly the Indian equity markets are sub divided across 12 sectors like IT, FMCG, Pharma, Auto, Banking, Finance etc. and not all sectors are created equal in their ability to deliver performance.
In times, when the economy is doing well, interest rates are falling, inflation is moderating and you will find economy facing sectors doing exceedingly well. On the contrary, if there is global uncertainty, possibility of inflation moving up because of appreciation in raw material prices, leading to rise in interest rates and depreciation of the currency you will find the defensive sectors taking the lead.
These trends based on broad macro factors lasts for years. So as an investor, why diversify across all the sectors for portfolio return.