“In the short run, the market is a voting machine, but in the long run, it is a weighing machine." - Benjamin Graham
These words carry even greater significance in the present as we observe global stock markets' turbulent and erratic behaviour. In the last six sessions, amidst mounting geopolitical risks and the toughening of US government bond yields, along with widespread selling and increased market volatility linked to the expiry of October derivative contracts, the Sensex has observed a substantial decline of approximately 3,300 points. The ongoing market correction, driven by a convergence of global factors such as geopolitical tensions, toughening bond yields, and growing economic concerns, has left many investors anxious.
While long-term goals are vital, the evolving financial landscape requires a proactive and informed approach.
Benjamin Graham, a legendary figure and the guru of Warren Buffett, stands as an enduring beacon of wisdom in the world of investing. My intent isn't to challenge his timeless principles but to shed light on the misinterpretation that has enveloped the notion of 'long-term investing' over the years. Long-term financial objectives should unquestionably remain at the forefront, yet the conventional 'invest and forget' approach no longer fits our dynamic landscape. Viewing the challenges of our ever-evolving world as a call to active engagement in your investment journey is paramount. This entails the delicate art of balancing action and inaction, driven by a meticulous portfolio assessment.
Let me share financial strategies beyond the usual 'invest and forget' approach, allowing you to make better-informed decisions.
Seasoned investors might consider buying during market dips, displaying agility with their stock portfolios. However, there's a fine line between seizing an opportunity and catching a falling knife or, in other words, buying when there's blood on the street. How do you discern whether the blood is not your own (especially for those already fully invested) or whether the knife has yet to fall further?
It's essential to differentiate between a market bottom and an ongoing descent. Experienced investors are less prone to grave errors, having learned from past mistakes. As an investor, businessman, and advisor, I can confidently state that becoming a proficient stock market investor typically involves making mistakes, for instance, selling off winning stocks prematurely, booking losses hastily instead of exercising patience, lacking dry powder (cash) to capitalise on promising buying opportunities for better returns, or straying from a well-planned asset allocation. So, unless you are certain, do not assume that the market has reached its nadir. Those who lived through the market crises of 2000 or 2008 understand the significance of this caution. Therefore, it's crucial to acknowledge that you might not know what you don't know. If you are a part-time investor managing both a full-time job and a business, it's advisable to approach your shopping spree cautiously in the current circumstances.
Avoid the error of acquiring assets indiscriminately. In the financial realm, you often hear experts and influencers advocating the purchase of stalwarts like HDFC, Bajaj Finance, Dmart, TCS, and ITC. While these are undoubtedly commendable companies, you need not pledge unwavering loyalty or become an ardent fan with regard to profit generation. It's crucial to detach yourself from emotion and concentrate on evaluating valuations and prospects. While these companies have indeed been prolific generators of wealth and might continue to do so, it's essential to assess the extent of their future potential. Given the ongoing disruption across various industries, it's uncertain whether these conglomerates can sustain the same growth patterns they have exhibited over the last two decades.
In the ever-evolving business landscape, new entrants can remarkably challenge established giants, as evidenced by two enterprising individuals who, in a mere decade, transformed a relatively unknown stock brokerage into a powerhouse that outperformed the likes of HDFC Securities, ICICI Securities, and Kotak Securities. Thus, one must question whether these industry behemoths will maintain their dominance. While they are unlikely to falter owing to their robust balance sheets and substantial cash reserves, the question that arises is whether they can continue to deliver consistent returns of 20 percent or more in the future and can you find better companies generating more returns, if you are a true stock market investor, you will do that. For those who do not wish to delve into this depth of analysis, I often advocate a straightforward approach—investing in mutual funds and channelling your primary focus towards your occupation or business. This is due to the higher likelihood of generating substantial returns, be it 1x, 2x, or even 10x, through your individual capabilities. After all, the most valuable financial asset you possess is yourself, and concentrating on your personal growth and financial well-being can be a wiser and more rewarding choice.
Another significant aspect to consider is exploring companies within the same or other sectors, provided they exhibit deep value and sound valuations. This is where proficient investor distinguishes themselves—by not merely replicating the crowd's investment choices. If your portfolio comprises solely the aforementioned blue-chip stocks, an index fund might as well replace it. These prominent stocks have demonstrated limited returns over the past two years. While they might still deliver respectable returns in the future, it's essential to continually scrutinise their performance and explore alternative, better investment opportunities if available.
I find many people wanting to or actually investing in stocks like Suzlon, Yes Bank, or Idea, perhaps swayed by the belief that they would yield substantial gains. Well, they may very well because you never know who is playing with the stocks, sentiments or fundamentals, mad bull runs, operators, and these factors can also drive these penny stocks trading at around Rs. 10, 16, or 32. My core questions are: Are these the stocks you genuinely want to buy based solely on the turnaround story? What percentage of your portfolio is this, and have you thoroughly analysed these companies? What percentage of your portfolio are they a part of, and have you done a thorough analysis of these companies, and are they better than other options on the market?
Many people today base their stock investments on news, WhatsApp University, influencers and whatnot. While that may have worked for some in the past due to the insane bull run after the COVID-19 fall, it will not last. An influencer was recently fined Rs17 crores for falsely claiming to generate profits on trading. In fact, he lost a couple of crores trading, and all the money he made was by selling courses which guaranteed returns of 200 percent and whatnot. Why would someone sell Rs500 courses if such gains were possible? With those types of returns, they'd outperform Mukesh Ambani in less than a decade.
I once heard a choreographer share a story about Hrithik Roshan. The choreographer tried to teach him a dance move, for simplicity's sake, worth Rs2, but Hrithik showed him moves worth Rs20 in return. Similarly, when someone claims extraordinary returns, a hundred others will make similar claims.
So, don't be swayed by impressive numbers from the last 2.5 years; they could be the Hrithik Roshan of the moment. Wait for more time to know who the real Hrithik is.
- Keep up with your SIPs (Systematic Investment Plans) and let dollar-cost averaging help you steadily build a robust portfolio while mitigating market volatility.
- If you have extra cash to invest, do it gradually, taking advantage of market dips, but always follow a well-thought-out plan. Stick to your risk tolerance and asset allocation, or consider mutual funds, where the management is in the hands of experienced fund managers, advisors, or distributors.
- Remember, "Mutual funds sahi hai!" You've probably witnessed the volatility of direct stock investments and how mutual funds can shield you from the shocks individual stocks can deliver. While stocks can offer significant returns, they can also erode your wealth if not managed correctly.
- Consider converting your liquid funds into equity funds to rebalance and optimise your investment during a market correction.
The writer is a Chartered Accountant and founder of NRP Capitals.
The thoughts and opinions shared here are of the author.
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