Quality investment! A valid strategy that focuses on the roots and wings to select stocks

Every successful strategy in sports, business, or life in general always has a solid foundation to anchor it through good times and bad.

Especially during the bad times, because that’s when the belief in his ideas and his approach is tested. This is even more true in the case of investments because one is exposed to a constant deluge of news on companies, markets, the economy, domestic politics, geopolitics, etc.

Plus, his investment portfolio is a number that always stares a nervous investor in the face, and with all the noise around, the sell and trail triggers are ubiquitous.

Has a new variant of the virus caused a sudden spike in infections in a country? Has the central banker, whether he is the chairman of the Federal Reserve or the governor of the Reserve Bank of India (RBI), yet said anything about rising interest rates? Has this caused a new wave of concerns in the stock markets?

In these turbulent times, the cautious investor is well served with a philosophy that keeps calm in the midst of chaos. This is only possible with a quality portfolio that allows you to sleep well, even if the markets were to close for a while.

Peter Lynch once remarked, “Success depends on ignoring the cares of the world long enough to allow your actions to accumulate.”

Without a principles-based investment philosophy that guides their decisions and keeps them focused, investors are likely to succumb to the herd mentality that can take them over a cliff.

In the Indian markets, we see how herds swarm around the shares of a particular group, pushing its price-earnings ratios into the hundreds, even as most companies in the group have debt well in excess of their equity.

A philosophy that enables “quality investing” is more important than strategy or tactics. A strategy can evolve over time while the philosophy is underpinned by strong principles that guide decision-making.

There have been several instances of promising stocks posting sudden highs, only to fall suddenly as the market inevitably corrects. A prudent investor steers clear of these stocks. Without a clear philosophy, this would not be possible.

The biggest benefit is controlling your emotions, eliminating the daily noise the market and the media throw at you so you can focus on what matters in the long run.

Because a 1,000 point drop in the Sensex is only a small drop in its long-term chart. Worrying in the short term will only compound any worries an investor may have and cause them to bail out a promising investment early.

Nassim Nicholas Taleb, in his book “Fooled by Randomness”, shows that “a 15% return with 10% volatility (or uncertainty) per year translates to a 93% probability of success over a given year. But viewed on a narrow time scale, that translates to a mere 54% chance of success on any given day.”

An investor is well advised not to track portfolio performance on an hourly or daily basis. It’s best to look at the portfolio once a quarter, provided you’re investing in quality stocks, following timeless principles.

The emotional stress associated with frequent checks is very high and has serious health consequences. In the long run, the wealth one has accumulated is not as important as the path traveled to achieve it and the “total cost” (emotional stress, loss of health, erosion of relationships) one has paid. for it.

When it comes to investment strategy, one can have several approaches to achieve one’s goals. One can buy stocks of a certain market capitalization classification – say large cap only, index funds only or small cap only, or choose one from the value, growth or momentum approaches.

We recommend sticking to strong roots (debt-free companies with consistently high return on equity and owned by aligned developers) and wings (companies with growing sales, operating profit and cash flow). growth).

Applying this criterion, we find that certain debt-prone sectors such as utilities, airlines and telecommunications may be less preferred.

Capital-efficient and consumer-driven sectors, such as consumer staples, manufacturing, e-commerce, technology, financial services, and pharmaceuticals, tend to have strong roots and wings. powerful.

That doesn’t mean the money can’t be made in other sectors. We are only interested in the one that focuses on quality and allows you to sleep well.

Once the quality investment strategy is in place, one can have various tactics to take advantage of market opportunities. No, we’re not talking about timing the market here.

Tactics could also exploit market anomalies such as poor pricing or a sudden information asymmetry that a studious investor encounters and throws away before others.

Depending on the situation, the investor can choose to “panic early or double late”. Difficult to reconcile conviction and adaptability.

Belief comes from the larger high quality investment philosophy and it is only experience, past mistakes and learnings that can make a person adaptable.

More than anything, sustainability is the key to investing. Almost everyone knows how Warren Buffet built his phenomenal wealth through sheer composition, with most of the portfolio added over the past two decades during an eight-decade career.

This ability to endure, or sustainability, is what leads to financial independence and the ability to live life on your own terms. When an investor starts out, they may be afraid of market volatility, but over time they begin to see volatility as an opportunity.

Indeed, over the course of a decade or so, they would have developed their own compass or found a trusted advisor who would become their investment compass.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

Comments are closed.