There has been a raging debate in the investing community for some time now regarding polarization. The perception is that broader markets have been lacking depth and that the whole index rally has been narrow and led by just a few stocks. The key question that everyone seems to be asking is – Are these polarized stocks too expensive? Should we buy them now? When would it all reverse?
Then there is an off shoot (or should I say extension) of the same thought process – should we buy these cyclical stocks? They are relatively inexpensive. The structural growth stocks are expensive right now, maybe enter them when they have cooled off a little bit? The inevitable thought process is to try and time the entry into equity markets correctly and choose the right vehicle.
Having given it a lot of thought, here is what I think of the whole issue. My opinion summarized in the following five points:
a) Valuations in isolation is a mistake: I always believed in one fundamental principle – just because something is 25x multiple does not mean it's cheap and just because something is 50x, does not mean it's expensive. Valuations in isolation have no meaning. Also, looking at it in the context of history is also not always right in a dynamic world. Valuations always go with growth. So, remember one thing – the "Good and Clean" companies will rarely come cheap.
b) Timing is tough, very tough: People always try to time the market. Always! And are rarely successful. The valuation data raged through H2CY19 and people kept avoiding them and they kept rising. I know so many people who lost money trying to time the market. The central idea should be to try and spend time in the market and not time. That's how wealth is created.
c) Flavour of the season: The third is the lure of the cyclical stocks. As I call them – the flavour of the season. They are essential if you are looking to outperform any benchmark index, but rarely useful if long term wealth creation is the aim. Long term wealth is always created by investing in businesses that are going to show consistent growth through periods of time irrespective of the valuation they trade at. Finding this tough to believe? Sample this – one of India's biggest conglomerates, which is the current flavor of the season, has actually yielded just 8 percent CAGR returns in the last 10 years (despite the recent rally) and consumer facing companies in paints and FMCG businesses have yielded 21 percent and 24 percent CAGR returns, respectively.
d) Business analysis is simpler than most think: Investment decisions need to be based on strong fundamental analyses, which is something we are all aware of. Most of us try to do this in whatever limited capacity we can. However, there is often a mental barrier. We all get so overawed by numbers, balance sheets, annual reports, etc. I'll let you in on a trade secret - investment decisions are often simpler than we think. Pick an industry that you think will grow steadily in the next 10 years. Pick the industry leader. Check the corporate governance and voila! I know I am over simplifying things, but believe me it's easier than it looks.
e) Obsession with quality: Corporate Governance is an issue often brought up in bear markets. In a bull run, people often forget it. That's the basic mistake. We need to stick to our discipline even if it means letting go of some money making opportunities. Money in such stocks is as easily lost as it is made. Capital protection should always be the primary aim. That's what we do at "Coffee Can".
So in short, be a tortoise and not a hare or you will fall asleep before the finish line. Wealth is always created over the long term by investing in quality stocks.
As we always say – Happy investing!
The author is Fund Manager, Coffee Can PMS at Ambit Asset Management.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.