With the Nifty, Bank Nifty, and Sensex hitting new highs daily and making investors cautious, fund manager Pankaj Tibrewal sought to allay fears about excessive valuations, and doubts about continued fund inflows.
“Historically, we have seen that fund flows and momentum can continue for a long time, and the expensive can get more expensive,” Tibrewal said, referring to the possibility that markets may keep rising despite being overvalued.
Tibrewal says that one should follow disciplined asset allocation and never try to time the markets. “One can never sell at the top and buy at the bottom,” he emphasises.
With over 20 years of experience, in his last role at Kotak AMC where he was for 14 years, Tibrewal led one of the leading small and midcap funds for over a decade. As the new year approaches, in a conversation with Moneycontrol, Tibrewal answers seven questions on investing in 2024.
What's the best hunting ground for small and midcaps for 2024?
Going into 2024, one should look for opportunities in sectors like banking, manufacturing, speciality chemicals, and pharma. (Recently, other market experts have also said that they believe that the BFSI and manufacturing sectors will emerge as investment themes for 2024, given their comfortable valuations).
What are the big risks for the markets in 2024?
2023 has been a great year for mid- and small-caps. Everybody has been greedy on the street. There has also been a lot of FOMO (fear of missing out). Next year could be tricky because we are already coming off a high base in 2023. And there are events like elections in India and the US. The big macro trade (trade based on large movements in the global economy) post-Covid seems to be behind us. And the big re-rating across sectors has happened. The market will turn out to be very stock-specific in 2024, so investors should focus on that rather than the macro narrative. Also, one needs to prepare for much higher volatility.
How do you avoid losing money?
What has worked for me over the years is proper portfolio construction. The portfolio should be constructed in a way that even if drawdowns happen, it is not impacted permanently. One should be aware of the beta risk one is carrying in the portfolios. (Beta is the measure that shows how much a stock moves with the market. High beta means it will beat the market when markets head higher, but also fall more when the market falls.) Do not go for isolated cases of greatness in one particular year, meaning do not pick a stock only because it has done exceptionally well this year. Look for stocks that have and can deliver stable and reliable growth over a long period.
Also read: Investing insights from a manager whose assets grew from Rs 113 crore to Rs 36,000 crore
Can you share your investment checklist, please
Over time, I have seen that it is important to define what your process, philosophy, and style stand for. While outcomes, especially in mid- and small-caps, are unpredictable, what is in your control is the process. Maintaining a checklist or playbook for stock selection helps.
My investment checklist includes business, management, and valuation. By business I mean looking at what the company does, and its competitive edge. Next is management: how strong is the management, and how do they treat their minority shareholders and employees — these are important factors. Lastly, the value you are paying for the stock is important. I believe in paying a reasonable price, never overpaying for a stock, and always having a margin of error built in.
Whether one is momentum, value, or growth-driven, one needs to have a checklist to evaluate companies — on both qualitative and quantitative parameters. You can improvise on this, but you should not dilute this process at any cost.
For example, if the checklist suggests that one should focus on 10 things: promoters, their background, their integrity, how they have behaved with minority shareholders, etc., do that. If the checklist suggests that you should do the forensics on the cash flow statement, balance sheet, profit and loss account, do that.
It’s important to research the quality, returns, and other aspects of a stock. At times, it may be better to rely on experienced managers who have seen multiple cycles and survived the market.
How do you measure quality?
Quality can be measured by the balance sheet, cash flows, quality of management, and ability to withstand headwinds maturely. We have seen companies that have come out of a crisis stronger. This is because of good management teams and promoters. One of my learnings has been to invest in businesses which can generate superior return on capital employed (ROCE) over sustainable periods, enabling them to reinvest cash flows back in the business at higher returns. (ROCE should be above the cost of capital. In India, the cost of equity is generally 12-13 percent, hence businesses which generate lower than that generally don't create value).
It is also essential to focus on the earnings capacity of a company rather than the earnings itself. Instead of focusing on where you can make 2-3 X returns in the next 12-24 months, find resilient companies where you can’t lose capital over the next few years. In my experience, it is these companies that have turned multi baggers.
Which stocks should one avoid?
One should avoid low-quality stocks, low free-float, and SME stocks. When the free-float is low, shares are in the hands of very few investors and that may give you a false sense of the stock going up. Still, it may not be the correct way of looking at it, because, at some point in time, the company would need to dilute or offer equity shares to comply with regulatory norms. Low free-float stocks are not a great representation of market discovery. Also, avoid and be careful about F&O trading, which is very prevalent nowadays.
What is one of the most important aspects of investing?
As an investor, you are your biggest enemy. In times of greed, you make mistakes, and when the time comes to invest, you are fearful. When prices are up, everything is good. We have seen that when the price narrative was powerful, people generally got carried away. You need to ask yourself that if tomorrow there is a 20 percent drawdown in the market, are you temperamentally able to withstand that loss? From 2017-2020, mid- and small-cap funds had a tough time because 2017 was the peak of the SMIDcap (small and midcap) market. Then, for three years we were in a bear market with negative or minimal returns. Hence, nobody wanted to put money in these stocks. One needs to ask that if 2018-2020 were to be repeated, will you be able to withstand that kind of a drawdown.
In longer periods, the probability of positive returns is higher. But in the short term, nobody can predict returns, hence how you behave is very important. I always say, “KYS (know yourself),” as KYS is more important than KYC (knowing your client). Knowing what kind of an investor you are will help you navigate cycles over the medium to long term.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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