ET Markets Smart Talk: Director of Research Shares Top Strategies To Become A Successful Investor

“Don’t compromise on the quality of the business or the margin of safety. If one compromises on these, then investment become difficult. It is crucial that one picks a business with 15-20% top-line growth and at least 15% ROCE with all other key qualitative and quantitative parameters in place.” Let’s take a look on best investment strategies according to market research companies report.

How can one become a successful equity investor? Any strategies or focus areas you would like to recommend?

There are multiple ingredients that can help one become a successful investor. One of the first things that an investor must have is a long-term approach. In the short run, markets are driven by sentiments and liquidity but fundamentals drive the markets in the long run. If investors approach the markets with a 1, 2, or 3-year horizon then creating wealth could become difficult.

“Most people want to enter the markets, but the key is to educate yourself about the market you are in (such as knowing the average Nifty growth in your country). The Nifty is a benchmark index and if you know where you are going, it’s easier to make decisions. If someone wants to enter the markets, they should consider at least a 5-year horizon. Then if we consider the long-term averages of GDP growth and Nifty growth in our country. The GDP average for 21 years was over 12%, and Nifty growth for the same period was around 14%. Investors can expect a similar range of compounding or a little more than that in the range of 20% but they must be patient.”

It is important to read, understand and educate yourself about the stock market so that you can become a long-term investor. For example, if one buys stocks at a high price in a particular year and the stock market grows only 5%, it doesn’t sound like much. But if one has learnt to invest with a long-term horizon of 5, 7 or 10 years, then one’s investment amount can grow at 20% per annum. Thus, from a retail investor’s perspective, equity turns out to be an outstanding asset class that offers remarkable returns as compared to other assets

How should one pick stocks amid volatile markets? Are there any rules or strategies an investor must follow?

Compromising on the quality of the business or sacrificing margin of safety is not an option during market volatility. The reason to this is that once you compromise on these then investment becomes difficult. You need to pick a business with 15-20% top-line growth and at least 15% ROCE with all other key qualitative and quantitative parameters in place. Our investors education platform Informed Investor has created powerful educational videos to help you understand this better

Qualitative and quantitative methods are used to analyze a business’s performance. With three or four qualitative parameters, up to three quantitative parameters, and the right diversification and risk allocation strategy, one can pick good quality businesses at reasonable rates right now.

When you’re investing in venture capital and private equity deals, it is important to evaluate top-line growth, bottom-line expansion ROCE ROE, and promoter quality. This way, we give clients a great opportunity to invest with a 5-7 year horizon. Additionally, they can enjoy compounding returns of close to 20% or higher.

if you use qualitative and quantitative parameters such as researching, searching and evaluating investment opportunities, implementing an effective risk allocation strategy and exploring growing sectors then that investor is likely to be successful.

The Rupee is depreciating, it is getting thrashed on a daily basis, we are fighting inflation, and there are recession fears. So what are your expectations from markets for the second half of 2022?

As a measure of the current state of inflation and future projections, you can use quarterly inflation data. You can monitor five to six key factors with the subsiding of inflation being one of them.

The normalization of interest rates is expected to put pressure on the rupee. However, we believe this pressure can easily be contained if the markets adjust to a higher interest rate scenario. Already in India, we have had two rate hikes and in the US, the Fed has announced three rate hikes. So, markets have already learned to adjust to high interest rates.

We expect a sell-off in FIIs selling, but it is not as bad as what has been predicted. The Nifty growth should also improve in FY23 in line with some of our expectations for the next 6 odd months. If all of these factors are manageable, and the Nifty growth as expected for FY23 will be between 18%-20%. For FY23 EPS target should be between 830-850 range and traders can expect around 10%-15% upside from index at 12 months from now

Investors have a hard time when interest rates increase and volatility builds. In such situations, we look for value in sectors unlikely to be affected by the global tensions.

At Research & Ranking, we are long-term investors. If we look at the long-term trends, Financial Services has been the best performing sector followed by IT, FMCG, and Auto. But then there comes a year like 2021 when sectors like Energy, Realty, and Capital goods outperformed all other indices.

We believe in the structural growth story. We want to continue investing in sectors that help in supporting India’s structural growth story.

Any Advice for all the new investors? Any hacks to manage the money or mistakes to avoid?

At Research and Ranking, we have developed four focus areas over the years. We have been in the advisory space for more than a decade and have enabled thousands of families to create wealth. These focus areas will help new investors as well as seasoned investors who want to tap into a unique asset class.

1- Stay away from Six Financial Diseases. 2- Leverage, Over or Under Diversification, No time to read, News all the time, Price is not everything and Excessive Churning.

The last two points that I would like to put forth and hopefully you would like to discuss are – ‘All years are not alike’. The year before that the returns were as high as 45%. So, all years are not going to be alike: if there is a negative growth year or a flat growth year, then it is advisable to allocate more as long as you have liquidity available because in those cases markets can deliver 40% to 100% in a year, so an investor will get better returns

We have been educating our clients about this over the years through timely interventions. If there is a period when the market has moved up by 50% or more don’t read too much into it. 50% or 100% growth year on year is just not possible. Likewise do not worry about a 10-15% fall; look at the 5-year horizon – the market will settle down as fundamentals will deliver in the long run

The last one is – ‘Cherishing a few’; which means staying away from over-diversification. Invest in 6 to 8 good quality businesses for a much longer period like a decade or more. Study these businesses in detail and if they have delivered close to 20% CAGR over the years, it will help in wealth creation for retirement or any other life goal

What is the investment strategy and what has been the performance of Research and Ranking?

We have a fundamentally driven long-term focus. Our strategy is to generate alpha taking Nifty as a benchmark. We have a 10-core-rule strategy on both qualitative and quantitative parameters to shortlist stocks. We use returns on equity (ROE), return on capital employed (ROCE), the number of years positive free cash flow delivered, sales, PAT and CAGR growth to determine the best stocks for our portfolio.

When applying for a loan, the qualitative parameters include the promoter’s holding, the management pedigree, future prospects of the company and the product, competitors, the market and industry standing.

With our Market Research team, we undertake thorough due diligence to create a mini-universe of attractive opportunities followed by the creation of a personalized portfolio tailored to the customer’s risk appetite and financial goals. As of 31st March 2022, our model portfolio has delivered 748% absolute returns since 1st April 2014. We continue to add more solutions and expand our offerings to different investor categories – especially on the basis of their investible surplus.

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