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TIPs... but only for long term investors

Sep 26, 2011

In the past one week, global equity and commodity markets have been severely battered. The Indian stock market have not been spared either. To get some outside views in this uncertain and volatile market, we attended a conference where four notable fund managers shared their views. The conference was organized by Narsee Monjee Institute of Management Studies (NMIMS) and sponsored by BSE Investor Protection Fund. The panelist included Raamdeo Agrawal (Motilal Oswal), Sunil Singhania (Reliance Mutual Fund), Nilesh Shah (Axis Bank) and Gul Tekchandani (Independent equity strategist) with ET Now as the media partner.

According to us, following are the key takeaways from the discussion.

  1. Long term India story remains intact: With its huge population and diversity, long term India story is well intact. The huge consumption boom within India cannot be ignored. It is pretty evident if we have a look at the world around us. Hotel and flights are running full. People are waiting to buy houses. Auto industry has had an amazing run and is expecting to have a good time for years to come. Education level for Indians is going up. Young India is increasingly materialistic and filled with aspiration. Many such factors bring the belief that Indian economy will continue to grow at significantly higher levels. However, there could be a relative slowdown in the near term.

  2. Boon for long term investor: Indian economy took decades to reach US$ 1 trillion from its lower base and only 5 years thereafter to double in 2011/2012. The incremental trillion dollars will come very fast and this linear increment will bring immense opportunities for businesses to grow exponentially. Assuming that investors invest in right businesses, this can turn out to be a huge opportunity for them.

  3. What to look for while investing? The parameters of long term investing broadly remain the same. They don't change with global economic concerns or a roaring economy. Therefore, instead of focusing too much on global macro news, it is important to understand the individual companies. Though there is no single formula to evaluate a company, it is important for investors to consider the following parameters (not in the same order of priority).

    1. Management quality - Being a minority investor, it is not possible to know finer details about the company under consideration. Therefore, it becomes important to invest in companies that are run by reasonably good management. However, investors should also understand that there is no single formula to check the management quality. It is more of an art than a science.

    2. Historical track record - This helps in giving insights about the company's performance and operations of the past. A healthy or unhealthy past record can help in gaining some insights about the future prospects of the companies.

    3. Long term sustainability of business - For a long term investor, one pertinent question to ask is: How long can the business survive profitability? An answer to this will help investors to judge the prospects better.

    4. Potential market size - When an investor compares the current sales of a company v/s the potential market size, he can gain perspectives on the potential growth for the company.

    5. Competitive advantage - It is always better to invest in companies having some advantage over its peers. The advantage can be in the form of brands or patents. It could also be in the form of its manufacturing process or sourcing resources. This will help in gauging the sustainability of profits.

    6. Diversification - Even after doing the required due diligence and following the principles of value investing, there is a possibility that investors go wrong in their investment decision. For this reason, it is better to diversify in few stocks rather than putting all eggs in a single basket. However, over diversification can seriously affect the portfolio return.

    7. Asset allocation - Asset allocation is a very important aspect that an investor should consider. Disproportionate amount of allocation to either one of the asset classes (Real estate, precious metal, equities, debt) can severely hurt one's wealth. Based on individual or family requirements, one should properly plan and invest in different asset classes.

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10 Responses to "TIPs... but only for long term investors"

Niranjan Kumar Khator

Oct 11, 2011

I have invested in Tax saving Mutual fund with 3 yr. lock in period from reputed fund house like, Sundaram,Franklin,DSP in the month of Dec 2007 when Sensex was around 16000 level,that what is today,But now four year is going to lapse, return are still on minus side. So somebody tell me how I benefited such a long term investment, only minus return ?

Like 

Ramanand

Oct 8, 2011

Another point to think is the interest rate cycle. While we are nearing the peak of the interest rates, we are still not done with it. We still have another couple of percentage points to go. We should wait till the interest rates have peaked before starting to look at the market for investment.

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gnanasekaran k.m

Oct 8, 2011

high return stocks for longterm return

Like (1)

Shrinivas

Oct 7, 2011

All the stock Gurus advise to buy for long term, but no one really defines what long term is & worse, no Guru tells investors to book profits when valuations are high.

Like (1)

L C Kapur

Oct 7, 2011

Let us not believe that longterm investment means invest and forget and relax in your arm chair for your successors to reap the fruits. It really means a dynamically managed portfolio with longterm perspective while weeding out nonperforming assets like the banks do for their NPA's.I recommend long term investment strategy with dynamically balanced portfolio by yourself or with the help of good consultant not involved with any fund house or company for his unbiased advice.

Like (1)

shridharan

Oct 7, 2011

Markets are ultimately dependant on liquidity.If there is no money chasing stocks then whatever be GDP growth market cap will not go up.The classic case is the current chinese mkts.The chinese gdp is growing at the rate of 9% but the markets from the top of 2008 i down i think more than 50%.Economy performance and stock market perf has direct timewise correlation.Stocks are another asset class which goes up and comes down due to reflation and deflation.However in the long run if there is a decent performance from the economy stocks tend to outperform other asset classes handsomely.It is the job of these guys to keep recomending investment because their job is dependedant on the retail investor putting money in MF and markets.

Like (1)

Dr Rajeev Kapur

Oct 6, 2011

i agree with sachin. The long term investment may be myth today. Fast changing tech, ownership and economic turmoil make it unlikely that the business will be there 20 years later. Even the stock expert will not be around 5years later. When the market is down they become loud in telling you to buy to get their commission knowing well that no one will question them 5 years later!

Like (1)

Sachin Lakshmanan

Oct 4, 2011

Indian Stock Market is heavily dependent on the monies from FIIs. The value of a company is decided by FIIs and not by their performance in terms of PBT, Historical track record, Management quality etc. When I started investing in equities in 2007, the Sensex was about 14000 and booming, was even expected to cross 50000 in a matter of 5 years which many prophets of stck market termed as long term. Now 4 years later the Sensex is stuck at 15000-16000 levels. My friends, don't listen to these Stock Market gurus. They will say invest, invest..because if we don't invest they will be out of business.

Like (1)

Peedikayil

Oct 3, 2011

It is easy to put suggestions and recommendations by experts, but it is very difficult for an investor to sit and watch your investments vanishing in front of your eyes within days. No company is immune from this volatility. I never found real reason for one company’s value crashes 40-50% irrespective of their good performance within days.
Most companies crash when market crashes irrespective of their name, stature, management, performance, or for their future perspectives. They come up when everyone has returned to buying mood. The equity market seems like a learned game; few are benefitted by this volatility. One who knows how to play this game effectively wins. Equity market is no more long term investment.

Like (1)

Sundar

Oct 1, 2011

I do not understand the meaning of long term. Is it 2 years or 5 years or 50 years? GDP has doubled in 5 years. Stock market has not doubled in 5 years. Sensex 11000 in 2006 has become 16500 in 2011. India is seriously short of companies with good quality on management. We require qualitative change in management style, Ownership structure, PSU unfair competition, insider advantage etc to go to next level. Otherwise we will eternally struct in the range 13000 to 18000 like DOW and Nikkei.

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