Indian investors are flocking to the equity markets in a big way. Individual investors are now holding more stocks than ever before as major indices like BSE Sensex and NSE Nifty climb to fresh highs. According to SEBI data, demat account additions rose to an all-time high of over 1 crore between April 2020 and January 2021. This is more than two times the number of new accounts opened in FY18, FY19, and FY20 together where about 40 lakh accounts were opened.
Meanwhile, stock markets were volatile and first-time investors grabbed the opportunity in the last 12 months for short-term gains. In fact, 2020 seemed like a fairy tale for investors who commenced their equity journey but the experience can be an upsetting one as the markets might not always turn out to be in your favour.
Investing in equities may not come with a guidebook but there are certain principles that an investor can always adhere to before making investing decisions. Some of the broad ones are outlined below:
Quality first, always: Investors can have varied time horizons for investing in equities. Some might look at it for the short term (~12/24 months) while some might stay invested for the long term (5 years+). Irrespective of the period, the first mantra is to always consider investing in companies that are of the highest pedigree. The companies that rank high on all quantitative parameters (like RoE, leverage ratio, and earnings growth), as well as qualitative parameters (like management pedigree, accounting policies, and treatment of minority shareholders) can be termed as Quality companies.
The Management is as good as the business: There is a saying in cricket, that “The Captain is as good as the Team is”. The same parallel holds true for business corporations as well. An average business run by extraordinary management can become a great business and a great business run by average management can lead to doomsday. In the Indian context, we have been privy to both the cases and hence from an investing standpoint, the former can be one of the foremost filters that an investor can apply.
Growth and pricing power: There are countless investing theories by great management gurus on why an investor should invest in companies that have a strong MOAT. In simple terms, MOAT refers to a competitive advantage that a firm has over its competitors. The MOAT helps to keep competition at bay and ensures the firm can maintain pricing power which will lead to superior margins. A firm that has a combination of pricing power along with industry growth can deliver consistently and lead to superior wealth creation.
Wealth preservation over wealth creation: The rule of math tells us that it is easier to recover when the fall is lesser. To put it in perspective, a fall of 20% will require a gain of only 25% to recover the capital, whereas a fall of 50% will require the investment to double to recover back the capital. Our subconscious bias towards investing, in any asset class, does not prepare us for a drawdown in the capital. But unfortunately, it is inevitable.
There are many ways through which an investor can develop exposure to equity markets. Investing in equities can be an overwhelming experience only when one follows the time-tested rules.
(Trideep Bhattacharya is Senior Portfolio Manager – Alternative Equities, Axis AMC. Views expressed above are his own.)
