Some of the lessons relevant for our market are summarised below:
Never fall in love with a stock. Always have an open mind
Emotional detachment is a must for getting rid of the positions when fundamentals are deteriorating. Personal liking/ disliking for products/ services should be the last factor considered during stock picking.
Buying stocks in a utility company is good because it gives higher dividends. But you will make money in growth stocks.
Very relevant for a developing country like India as only growth can lead to compounding of earnings and hence return. High dividend-yielding companies will never turn into multi-bagger stocks. Continue to follow growth strategy even with a risk of underperformance for a period of 2-3 years.
Understanding the reasons for past sales growth will help you to form a good judgment as to the like hood of past growth continuing.
It increases your conviction about the continuation of good performance in the future. It may also help you to avoid performance traps and better assess the turnaround stories.
The best stock to buy may be the one you already own:
The best course to follow is during the panic mode of the market. Improvement in fundamentals may prompt you to increase weightage in existing stock rather than looking out for new stock.
Never bet on the comeback when they are playing ‘Taps’
One may lose money or make money on stocks. One must avoid holding on to the stock or worse buying more of it when fundamentals are deteriorating. A better strategy would be to sell into decline and look out for better opportunities. Such thinking prompted the exit of positions in some of my holdings recently.
Just because the stock is cheaper than before is no reason to buy it. Just because the stock is expensive is no reason to sell it.
It is a little tricky as one may be too late to sell at a good price or one may miss out on multi-bagger. In the absence of deterioration in the fundamentals, outliers in sectors like Banking, FMCG, Air-conditioning continue to find a place in the portfolio even though the valuations have become expensive.
A company that captures a higher market share in a stagnant market is a lot better off than a company losing market share in an exciting market. Avoid hot stock in hot industries. Great companies in cold/no growth industries are consistent winners.
Dominant market share in a no-growth industry means the absence of weak players leading to better pricing/margins in the long term. The high growth industry attracts too much competition which may lead to sub-optimal performance in the long term.
Unless you are a short seller or a poet looking for a wealthy wife, it never pays to be pessimistic.
Better to err on the side of optimism especially when the economy is in the doldrums and things are not getting better.
Buying cyclical after several years of record earnings and when the P/E ratio has hit a low point is a proven method of losing half the money in a short time. Conversely high P/E ratio is a good thing for cyclical. It is perilous to invest in cyclical without having a working knowledge of the industry.
Here the danger is that one may end up buying too early. The declining P/E ratio for the metal sector in the last two years prompted maintenance of an underweight position in the Metals sector.
Unlike in short term, there is a 100% correlation between the success of the company and the success of its stock in the long term.
It pays to be patient to own successful companies. Some of the positions in the banking and cement sector remained core holdings for the last ten years.
Long shots always misses the mark.
Paying too much attention to the long-term prospects at the expense of recent performance may lead to disappointing outcomes in most cases.
Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with its poor balance sheet. Always look at the balance sheet to see if a company is a solvent before you risk money on it.
Deterioration in the balance sheet is the first sign of challenges faced by the business. It is very apt for working capital-intensive businesses like constructions.
While investing in the troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival.
The underweight position in the Telecom sector explains the above thought process.
Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you have invested.
The fund management team refrained from taking calls on cash positions over the last decade and mostly focussed on a bottom-up approach to stock picking.
– Repost from UTI Mutual Fund