Although the Nifty recovered from 15,293 on June 17, 2022 to 17,530 on September 16, 2022, one may wonder which way to go.
Mature investors may have seen several cycles and formulated investment strategies that work for them. However, investors who are new to the market will be looking for clarity.
Here are 5 effective strategies for general investors to succeed:
1) Buy businesses, not stocks
Investment decisions are often based on stock prices. However, you don’t just buy shares of companies you like; they buy companies whose shares are traded on the market.
For example, when Warren Buffett invests, he believes he is buying a company that would still be successful if the stock market closed.
He focuses on buying businesses with a fantastic management team, brand equity, and pricing power. These deals may not sound exciting, but they are stable sources of money that will increase shareholder value in any economic situation.
To understand this better, let us consider
. Please refer to the following table:
Between 2006 and 2011, HUL’s stock price was range bound. Investors would have witnessed marginal returns during this period. However, HUL was consolidating, and beginning in the second half of 2011, the share price began to rise.
Therefore, an investor who only focused on the share price and did not analyze the underlying business would have sold the shares between 2006 and 2011 and missed out on the fantastic returns that HUL offered from then on.
HUL’s net income doubled during FY11-17 and again during FY17-22 compared to little growth during FY06-11.
2) Invest for the long term and let compounding work its magic
A common mistake most investors make is trading and timing the market. It is not possible to time the market when investing for the long term.
If one wants to enjoy compounding profits, then timing the market is more important than timing the market. See how spending more time in the market can help you grow your wealth exponentially.
Based on the table above, the longer you let your investment grow, the higher the value of the final corpus. Assuming your CAGR is 15%, your investment grows 4x in ten years, 16x in 20 years, and a remarkable 66.5x in 30 years.
As most of us would know,
and delivered 34% CAGR (300x) and 24% CAGR (70x) over the last twenty years. They formed the bulk of ace investor Late Shri Rakesh Jhunjhunwala’s portfolio.
He had started buying shares of Titan and Crisil between 2002 and 2003, respectively. This is a powerful example of building wealth through long-term investing.
3) Be mindful of diversification and asset allocation
Experts often talk about having a concentrated portfolio of 7-10 stocks. However, this may not be to everyone’s liking. A retail investor may be better off with a diversified portfolio of 20 to 25 stocks across industries and market capitalization.
Second, you may not want to allocate more than 8% in a single share. An allocation ratio of 3% to 7% per share, depending on risk appetite, goals and other factors, is more practical.
For example, several new age stocks that debuted on the markets last year have lost between 40% and 60% in the last year; so an allocation of 10% or more in any of those stocks would have wiped out 4-6% at the portfolio level.
Therefore, an approach that takes into account stocks across sectors, market capitalization, high-medium-low risk categories, growth and value will withstand pressures in times of stress and generate healthy alpha and will create long-term wealth.
4) Start with any amount
Most people believe that a large amount is needed to start investing. That is a myth. Whether you have Rs 1,000 or 1,00,000 and more, it makes a lot of sense to put money to work.
Wealth is accumulated over time and not overnight. One needs patience and consistency to create wealth. But to create enormous wealth you have to start early.
For example, Ram invested Rs 10,000 when he was 25 years old and Ramesh invested 10 times more than Ram or Rs 1,00,000 when he was 45 years old. Both investments grew at a CAGR of 15%. By the time they both turned 60, Ram’s investment had grown to Rs 13,30,000 and Ramesh’s investment had grown to Rs 8,10,000.
5) Seek the advice of qualified experts
Today, there is no shortage of information. In addition to advice provided by family, friends, or colleagues, investors find it difficult to distinguish ideas from noise.
In addition to the experts who appear on the news channels, there are financial influencers who take advantage of the Internet to share their views. In such a scenario, an investor might want to seek the advice of SEBI-registered investment advisers, paying a fee rather than relying on the recommendations of those who have nothing in the game.
Investing is a journey and there are always new milestones to reach and hitherto unknown knowledge to discover. However, the fundamentals of correct investing remain the same and investors should focus on adhering to them.
(The author is Chief Investment Officer (CIO), Research & Ranking. Recommendations, suggestions, views and opinions are his own. These do not represent the views of the Economic Times)