Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Don’t miss the wood for the trees - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 29, 2001

    Don’t miss the wood for the trees

    We have often heard market experts say India is a ‘stock pickers’ market. That’s actually quite true – as a long-term investor if you had picked Infosys, Hero Honda, Cipla or Britannia or even Zee for that matter (Zee now trades post split 10 for 1), you should be congratulating yourself. As a stock picker, one did the right thing if one bought Hero Honda instead of Bajaj Auto five years ago because it took some astute judgement then to figure out the huge trend away from scooters to motorcycles and with it the fact that Hero Honda with its 4-stroke motorcycle technology was very well positioned to capitalize on that boom. Over this period, Hero Honda has made handsome returns for its shareholders while Bajaj Auto shareholders have to rue the fact that they were poorer despite investing in one of India’s cash-rich ‘solid-as-a-bank’ company.

    For a moment, I am not suggesting that ‘stock-picking’ is unimportant but equally important if not more is ‘asset allocation’ especially in these exciting times of high market volatility. Simplistically, on a very broad level, one decides what amount of money is to be parked in real assets and financial assets. Going down a notch, one decides how much of the financial assets portfolio should be in fixed-income and equity. Equity obviously has with it a greater variability of returns, which all the more underlines the need for diversification in a successful equity portfolio. So as an investor, before you start wearing your thinking hat and picking up the stocks you want in your equity portfolio, you first have to decide how much of your hard earned money should be in IT, pharma, consumer, cement or any other sector. Asset allocation basically imparts a discipline to the investment process and is a good risk control measure.

    Simple as it sounds, but asset allocation is not something which many lay investors, or for that matter, even high profile (and highly paid) fund managers paid much heed to in recent times. So while your neighbour, Mrs. Sharma is telling you about the huge losses in her portfolio, she is only telling you half the story – what she probably missed telling you is those huge losses were mainly because of her following her broker’s great idea of putting all the money in a few ‘hot’ momentum stocks (‘momentum’ for the better part of the last year meant IT). Some consolation for her though - many fund managers did the same not-so-bright thing. So we had equity funds which had at some times over 60-70% invested in the TMT sector, balanced funds which to start with itself were unbalanced with close to 70-75% invested in equities and a major portion of those equities invested in the TMT sector. Some enterprising funds even tweaked definitions to get TMT stocks into so-called broad-based equity funds. The huge sell off in the TMT sector has seen many of the fund NAVs dropping steeply and causing the unit holders much pain and disillusionment. Investors henceforth would do well to closely study a mutual fund’s sectoral composition before investing.

    In my opinion, the key lesson for investors and fund managers alike, is to first get the asset allocation right and then go about picking stocks.



    Equitymaster requests your view! Post a comment on "Don’t miss the wood for the trees ". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 (Close)