Sep 26, 2011|
TIPs... but only for long term investors
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.
- 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.
- 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.
- 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).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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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