On today’s podcast, we are going to try and ease your doubts about stocks and equities, and get you comfortable with them.
Hrishi K: Hello and welcome to another episode of NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl. My name is Hrishi K and I am your host on this podcast. It’s all about getting your money to make better investments for you in the new financial year.
We are already in the final month of the first quarter of the calendar year, and things are starting to heat up. The Lok Sabha elections are upon us and you know what that means: It means our stock markets are going to see fluctuations based on the daily political news coming out. Now, stock markets and equities are the barometer of a country's economic growth. If the markets are up, it means the country’s economic future is bright. A good head for a stock market can make you a millionaire but the road is paved with potholes and ditches.
People get very excited when it comes to stock markets and equities. A lot of people look at markets as a get-rich quick pathway, some prefer to not directly invest in equities, and others keep away from it completely. Yet, there are those who understand the power of good stock markets investments. And how to make millions off the stock market. Most of the world’s richest people owe their success to holding a large piece of stock of a particular company, or several smaller pieces of many companies.
Well, the new financial year is already here. A lot of us haven’t gotten into stocks and equities because we have apprehensions about stock markets. Well, not any more. On today's podcast, we are going to try and ease your doubts about stocks and equities, and get you comfortable with them. Let’s get started with equities. Let's build some wealth!
National Stock Exchange (NSE) with the help of Invest – O – Cast (An exclusive investor podcast) Powered by MoneyControl is committed to break the limitations of geographical boundaries and reach investors across the country. India has one of the youngest populations in the world, and the whole world believes that the Indian economy will continue to grow. On today’s episode, we will look at the baby steps needed to set up shop in the equity market.
Let’s welcome our guest of the day. Let’s say hi to Ashish Shankar, Head - Investment Advisory at Motilal Oswal Private Wealth Management. With over two decades of experience in the financial sector, Ashish is an expert on the markets and advising individuals on investing their hard-earned wealth. A key member of the management team at Motilal Oswal, Ashish manages teams across four key verticals: financial strategy, products & research, estate planning and client experience. Hey Ashish! Welcome to Invest-O-Cast, Ashish. It’s so great to have you here.
Ashish Shankar: Thank Hrishi; it is an absolute pleasure to be on your show.
Hrishi K: Equities have always held a fascination for us Ashish. In your opinion what are the golden rules for investing in equities?
Ashish Shankar: So Hrishi there are couple of golden rule. One come to equity market with time on your side because at the end of the day when you are buying stocks you are essentially buying pieces of businesses. And businesses take time to deliver and grow their profits, so if you do not have time on your side you should not be in equities. The second golden rule is you should know what you are investing in, if you are investing in the pieces of business the first thing you should do is try and understand the under lying business and try and estimate how this business will grow over a period of time, because in the longer run you will make as much money as the business does. In case you do not have the expertise, time or inclination to understand the business and monitor it on regular basis don’t worry, there are other ways to participate in market there are indirect ways like mutual funds. But again the 2 golden rules are 1) have time on your side; B) understand the businesses you are investing in.
Hrishi K: So you are saying that potential investor people who haven’t ever got into equities before entering the world of equities this is pretty much the need to keep in mind. Anything you would like to add to that?
Ashish Shankar: The only other thing I would like to add is do not invest in something that you don’t understand, try and build on the circle of your competence, so I can give you the example. Let’s assume that somebody is working in the Pharmaceuticals Industry and he understands that industry very well. This guy is better of trying to buy companies which are in the Pharma industry because he has an edge there. However if this guy doesn’t understands let’s say the capital goods industry then he has no business trying to own stocks which are in that industry, like I said mutual funds are always a good idea for first time investors.
Hrishi K: We’ve all heard of people becoming overnight millionaires through stock markets Ashish. That’s not going to happen to at least 99% of the time or with 99% of regular investors. What are some realistic expectations for all of us to have?
Ashish Shankar: Yes, so that’s always a lure right? That’s always a lure to get rich fast thing and that’s why you see so many people going to casinos or buying the lottery tickets in the hope that they are going to win the million dollars which is the price of the lottery tickets. However I can tell you with experience for almost more than 2 decades now. It doesn’t work like that in the stock markets. It may work for sometimes, so you may buy a stock and it may go up, it may double or it may even triple in a very short period of time but if you spend long enough in the market you will realize that eventually there is a concept called ‘Mean Reversion’ which catches up with you. Like I said earlier ultimately the returns that you will make from your equity portfolio will mirror the business growth of the underlying companies of the portfolio that you hold. One way to try and arrive at a reasonable return is to look to what has happened in the past. So if you see the history in the stock markets in India the Sensex or the Nifty which are the 2 common indices that investors track. It pretty much gives you what is the health of the economy and it’s the reflection of the market. Over the last 30-35 years the Nifty and the Sensex have delivered close to 16% return per annum, so that’s a good starting point to set-up and expectations. So if you end up making 15 I would like to say it is a bonus.
Hrishi K: Now we can categorize investors into risk takers, risk averse people and someone in the middle. My question to you, are there equities for all kinds of investors? And beyond that what role does risk appetite play in this investment?
Ashish Shankar: Right. So Hrishi that’s an interesting question and I get asked this by many investors as to, are there different types of you know different people should own. Although there are lot of theories around it but my view is ultimately if you are buying a stock you are buying a piece of business and in my frame work there are only 2 kinds of stocks, there are ‘Good stocks’ and there are ‘Bad stocks’. The good stocks which make more money than the Cost of Capital, so if the Cost of Capital in India is let’s say 12 or 13% and businesses which makes more than let’s say 15 or 16% are good business. So at the end of the day if as an investor who want to create wealth over a period of time you should ensure that you are invested in businesses that generate a return which is higher than Cost of Capital and if they do that consistently I can assure you that you will a lot of money in the long run. The bad businesses are the businesses which don’t even make the cost of capital, so if let’s say there are borrowing of 10% but the money that you are borrowing is only earning you 5% return on the capital employed then you are actually losing money and there are lot of such businesses which exist in India and the problem is this businesses when they grow they compound the problems. So these are the business to avoid, so ensure that you are invests in good quality businesses. Again if you are not an expert and you don’t have the time and inclination to do this then find a good fund manager or a mutual fund who can do it on your behalf. Coming to the second part of the question Hrishi, often you know I find this dichotomy of risk appetite and risk temperament. And allow me to elaborate here, risk appetite is something that you say upfront, so whenever we meet clients we ask them what their risk appetite is and by that what we mean is are you willing to see your portfolio fluctuate let’s say go down by 5% - 10%, are you willing to live with that kind of volatility. If for 5% down take on your portfolio and if 5% downside on your value of your portfolio disturbs you then obviously equities is not an asset class for you. The second part when I said risk temperament, what I meant was upfront let’s say you may say I am willing to tolerate 10-20% downside on my portfolio but when the event actually happens a lot of investors tend to panic and that is when you know the temperament of the client. So if you spend let’s say 2 to 3 years in equities or even 4 years longer the better, you get to know what your risk temperament is and these 2 things are very critical in determining how much equities you should have in your portfolio. Because remember at the end of the day investments are there to ensure you have a peaceful retirement or you meet all your goals but at the end of the day it should also not give you sleepless nights, the journey should be peaceful and enjoyable.
Hrishi K: You are listening to National Stock Exchange (NSE) presents Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl we’re committed to break the limitations of geographical boundaries and reach investors across the country. Our guest of the day Ashish Shankar, Head - Investment Advisory at Motilal Oswal Private Wealth Management. He’s talking to us about getting started with equities. So are equities a good option for investors, who are risk averse, tell us that.
Ashish Shankar: So there are 2 types of risk, one is volatility which is temporary loss of capital and the second is the permanent loss of the capital. I feel that the investor should be concerned about the second risk more than the first risk which is the permanent loss of the capital. Hence, even risk averse investors should have some equities in their portfolios because if you do not have equities the risk is that your capital will not grow above the cost of inflation, so if you have 100 rupees today tomorrow the 100 rupees is worth 94 because your cost of goods or inflation is rising at 6% per annum. So there is a risk of not being invested in equity as well. So I strongly believe that even a risk averse investment should have some allocation to equities. Now what is that right allocation can be decided with the financial advisor.
Hrishi K: Direct investing in stocks or investing through mutual funds. What is the route you would advice?
Ashish Shankar: Yes, so direct investing in stocks requires time. It requires a reasonable understanding of a few businesses because at the end of the day if you have to understand how some of these businesses will make money he needs to understand the fundamentals of those businesses. If you do not have time inclination or you do not have the expertise then it is better to start with a good quality mutual fund. In fact for a first time investor into equities I would strongly recommend that they start with a high quality mutual fund, they should watch how the fund invest, what are the companies they are buying and then if they really have the inclination to start buying direct equities I would say they can do it after they’re invested in a fund for a while.
Hrishi K: Well, Warren Buffett has said Ashish that when he buys a stock, he wants to keep it in his portfolio forever and ever. Does the same rule apply for Indian markets as well? Would you elaborate?
Ashish Shankar: Yes, so Buffett is the most successful investor in the world and we take whatever he says very seriously, however even Buffett has 2 parts to his portfolio. There are companies he buys of completely and these are the kinds of companies he wants to own for life but remember in these companies he is really a business owner and he has control over these businesses. There is the second part of Buffet’s portfolio as well which is a portfolio of stocks which are listed. Now even here there are lots of companies which he holds for a long periods of time but as opposed to the companies that he owns completely this part of his portfolio he monitors pretty frequently and does make changes as and when requires. So my recommendation to investors if they have invested directly in stocks is that they need to continuously monitor their portfolio and the underlying businesses because even over a longer run there are businesses which also go throw cycles, so you don’t want to stock in the businesses which is at the sunset of its growth phase because the value destruction can be quite quite dramatic. So to sum-up the answer one need not make changes very frequently, however one has to be vigilant and take action as and when needed.
Hrishi K: What percentage should equities hold in our asset portfolio? Can you actually break that down according to different age-groups please?
Ashish Shankar: So, the traditional classic portfolio theories says that you should have one third in equities, one third in fixed income and one third you should have in real estate right? Now this is an age old theory, however this can be adjusted depending on the individual comfort of the investor. So if somebody is very very comfortable holding equities you can go up to 50, 60, 70% in equities and have lesser in debtor and real estate, however as you go closer to your retirement and you need cash flows from your portfolio you can go towards one third equities. So as your cash flow requirements come closer you should go towards one third equities else you can be 50% or higher invested in equities. Again you know there is no simple answer for all investors, it has to be customized but one third is a good starting point for equities and it can go up as high as two thirds and you know come down to one third when you are closer to retirement, you now if the goal is approaching closer.
Hrishi K: A lot of people Ashish, get emotionally attached to the stocks they hold. Give us a tip or 2, how do you avoid getting attached to ones stocks?
Ashish Shankar: Yes, it is very difficult not to getting emotionally attached because as human beings we are emotional in our outlook. One method which has worked for many investors is to write down why you bought a particular stock, so there is always a certain hypothesis based on which you buy a stock or a business and on a regular basis you keep revisiting that hypothesis. If that hypothesis doesn’t hold true then you must take action or sell the stock or buy more of the stock if the hypothesis becomes stronger. I think by writing down a lot of your investment hypothesis you can save yourself from the emotional biases that occur when you invest in stocks and it can bring down the emotional quotient in managing an equity portfolio.
Hrishi K: Well, that’s all the time we have as far as questions are concerned today. Ashish was very kind letting us speak his mind. He has simplified a topic that all of us has always been fascinated by but haven’t really had the guts or the inclination to enter. I am sure our listeners are a lot more confident after today’s sessions with Ashish Shankar.It’s now time for ‘Wisdom in the Bank’, the segment on this show that does a quick recap of all the points that our guest has spoken about.
- Treat stocks like pieces of business and understand the business you are investing in
- Businesses take time to realize their potential. Before entering equities make sure you have time on your side.
- There are good companies and bad companies that’s it, whatever type of investor you are be concerned for the kind of companies you want in your portfolio.
- Risk appetite is what you say upfront, Risk temperament is what you do, so Risk appetite basically means you say you’re willing to take a hit of 10-20% a downward spiral in your portfolio. But Risk temperament is how you actually behave when that happens.
- Everybody should have some allocations to equities, if your risk averse your allocation can be moderate
- If you are a first time investor mutual funds are safer because you are looking at stocks through the lens of an expert. Once you have been in mutual funds for about 2-5 years then you can think of equities.
- Warrant Buffett’s moral is one he becomes the business owner, he buys the entire companies. Two he buys pieces of companies and keeps a keen eye and keeps a watch on portfolio and takes the necessary action.
- A traditional portfolio has one third equities, one third debt securities and one third real estate. As your cash flow requirements change this has to change.
- A good way to detach yourself from your equities is write down why you bought stock in the first place and keep revisiting it, something simple.
Well all the key points that we discussed with Ashish Shankar, Head - Investment Advisory at Motilal Oswal Private Wealth Management on today’s podcast. It’s been a great episode and we have had a lot of fun talking about equities. We hope this has been as informative to you our listeners as it has been for us. Ashish, thanks very much. It’s been an absolute pleasure and blast hanging with you on the show today. Cheers!
Ashish Shankar: Thanks a lot Hrishi; it’s been a pleasure at my end too.
That’s a wrap on our show NSE presents Invest-o-cast! I am your host Hrishi K for the NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl. To know more about our podcast, log on to moneycontrol.com and visit the podcast section. In case you would like us to address any of your investment queries on our show do write into us at: email@example.com. You can also reach out to us on Twitter @moneycontrolcom or Facebook @moneycontrol.com; do remember to use #nseinvestocastThank you for listening!