Think of long term investing as a series of short terms: Union AMC's Harshad Patwardhan

"It's not easy to figure out where you are in the cycle. But if you develop enough evidence and conviction where you are in the cycle, the next step is to position your portfolio based on where you are in the cycle," he said.

When investing in the stock market, investors should think of long term as a series of short terms, or think in terms of market cycles, said Union AMC's Harshad Patwardhan. He was speaking at the Ideafest 2024 event.

When market experts talk about a certain scenario playing out, it is one of the many possible scenarios and not a definite one, Patwardhan said.

Also read: Four stages of a market cycle: Where are we currently?

So, how does one approach the markets in such a situation?

Viewing the long term as a series of short terms or thinking in cycles makes two things clear for investors, he said.

First is the dispersion of returns among sectors, regardless of market conditions—whether up, down or sideways. For example, he explains: If one looks at the returns over the last 10 years (NSE 500), there is a significant dispersion between the top three and bottom three performing sectors, ranging from 30 percent to 56 percent. "There are alpha opportunities available to be exploited no matter what the market is doing," he added.

The second is the role of cyclicality in sectors. "Pretty much everything that matters in our markets actually goes through cycles depending on various factors/variables. If you look at the macroeconomic variables, they fluctuate. Inflation rises and falls, interest rates rise and fall, and so on. If you look at various industries, they also go through their cycles," he adds. There is no one sector that is always at the top or the bottom.

Three-point approach

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Conventional wisdom, he adds, often suggests the approach of buy and hold by investing in companies with strong management. But Patwardhan adds that it is not always the case that a company with good management has performed well over extended periods.

Summing up, Patwardhan suggests a three-prong approach: a)Break the long term into shorter periods or think in cycles. b)Accept that the market goes through ups and downs naturally, and c) evaluate where a particular sector or stock stands within the current cycle carefully.

"It's not easy to figure out where you are in the cycle. But if you develop enough evidence and conviction where you are in the cycle, the next step is to position your portfolio based on where you are in the cycle," he said.

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