Investors who entered the markets during early 2020 and witnessed a surging bull phase that lasted till January 2022 are trying to make sense of the markets.
Although the Nifty has rebounded from 15,293 on 17th June 2022 to 17,530 on 16th September 2022, one may be wondering about the way ahead.
Mature investors may have seen multiple cycles and would have formulated investment strategies that work for them. However, investors who are new to the market would be seeking clarity.
Here are 5 effective strategies for investors across the board to become successful:
1) Buy businesses, not stocks
Often, investing decisions are based on share prices. However, one does not just buy shares of companies they like; they buy businesses whose shares are trading in the market.
For instance, when Warren Buffett invests, he believes he is buying into a company that would still succeed if the stock market shut down.
He focuses on buying businesses with a fantastic management team, brand value, and pricing power. Such businesses may not seem exciting, but they are stable sources of money that will increase shareholder value in any economic situation.
To understand this better, let us consider
. Check out the following table:
Between 2006 and 2011, share price of HUL was range bound. Investors would have witnessed marginal returns during this period. However, HUL was consolidating and from the latter half of 2011, the share price started going up.
Therefore, an investor who only focused on share price and didn’t scrutinize the underlying business would have sold the shares between 2006 and 2011 and missed the fantastic returns that HUL offered from there on.
The net profit of HUL doubled during FY11-17 and again during FY17-22 as compared to the meagre growth during FY06-11.
2) Invest for the long term and let compounding work its magic
A common mistake most investors make is to trade and time the market. Timing the market is not possible when one invests for the long term.
If one wants to enjoy compounding gains, then time in the market is more important than timing the market. Check out how spending more time in the market can help you compound your wealth exponentially.
From the table given above, the longer you let your investment grow, the higher the value of the final corpus. Assuming your CAGR is 15%, your investment grows by 4x in ten years, 16x in 20 years, and a remarkable 66.5 x in 30 years.
As most of us would be aware,
delivered 34% CAGR (300x) and 24% CAGR (70x) during the last twenty years. They formed a lion’s share of ace investor Late Shri Rakesh Jhunjhunwala’s portfolio.
He had started purchasing shares of both Titan and Crisil between 2002 and 2003 respectively. This is a powerful example of wealth creation by investing for the long term.
3) Be aware of diversification and asset allocation
Often experts talk about having a concentrated portfolio of 7-10 stocks. However, this may not be everyone’s cup of tea. A retail investor may be better off having a diversified portfolio of 20-25 stocks across industries and market cap.
Secondly, one may not want to allocate more than 8% in a single stock. An allocation ratio of 3% to 7% per stock depending on risk appetite, goals, and other factors is more practical.
For instance, various new age stocks which debuted in the markets last year have lost between 40-60% in the last one year; so an allocation of 10% or more in any one such stock would have knocked away 4%-6% at the portfolio level.
Thus, an approach that factors in stocks across sectors, market cap, high-medium-low risk categories, growth & value will withstand pressures in times of stress and generate healthy alpha and create wealth over the long term.
4) Start with any amount
Most people believe that one needs a large amount to begin investing with. That is a myth. Whether you have Rs 1,000 or 1,00,000 and more it makes perfect sense to put money to work.
Wealth builds over time and not overnight. One needs patience and consistency to create wealth. But to create tremendous wealth one must start early.
For example – Ram invested Rs 10,000 when he was 25 and Ramesh invested 10x that of Ram or Rs 1,00,000 when he was 45. Both their investments grew at a CAGR of 15%. When both became 60, Ram’s investment had grown to Rs 13,30,000 and Ramesh’s investment grew to Rs 8,10,000.
5) Seek advice from qualified experts
Today, there is no dearth of information. Apart from tips provided by family members, friends, or colleagues, investors are finding it difficult to discern insights from the noise.
In addition to the experts featured in news channels, there are financial influencers who are leveraging the internet to share their views. In such a scenario, an investor might want to seek advice from SEBI registered investment advisors, by paying a fee rather than relying on recommendations from those without any skin in the game.
Investing is a journey and there are always new milestones to achieve and hitherto unknown insights to discover. However, the fundamentals of investing right remain the same and investors should focus on adhering to them.
(The author is Chief Investment Officer (CIO), Research & Ranking. Recommendations, suggestions, views and opinions are his own. These do not represent the views of Economic Times)