By: Anubhav Mukherjee
1. Stop chasing after each short term trend or fad in the market. Generating healthy returns by investing in every new fad or hot sector and continuous portfolio churn without true understanding of fundamentals is impossible. Only deep understanding of sectors and businesses developed after thorough research & diligence and then patiently remaining invested in good quality businesses and management teams can lead to outsized investing returns.
2. Learn to endure market volatility and short term corrections. Markets will be volatile driven by fluctuating investor sentiments, liquidity, FII inflows, etc. All factors over which businesses have no control but which impact their share prices in short term. Moreover, given how volatile macros are, businesses will face short term challenges like rising inflation, blips in demand, irrational competition, etc from time to time. If the businesses one is invested in are inherently high quality businesses run by honest and competent managements then they will overcome short term challenges to deliver industry beating performance in long term and outsized returns. One has to endure short term volatility and corrections to enjoy the long term outsized returns delivered by exceptional companies.
3. When investing in any opportunity, form a clear investment hypothesis and identify key operating and financial metrics to track whether one’s ingoing thesis is working out or not. For example, you may invest in a business with the thesis that its RoE (return on equity) will increase substantially during your investment horizon and so it will rerate and deliver great returns. For that to happen, some operating metric(s) has/have to improve like working capital should reduce or utilisation should go up or product mix should improve leading to higher profitability during our holding period. So, one has to identify the metrics at time of initial investment and then track their progress over time. Obviously one should be patient and give the company appropriate time to improve that metric. However, if one sees that there is no measurable improvement in that metric even after remaining invested for ample time, then one should exit or reduce the size of that position. On the other hand, if there is better than expected improvement in the identified metrics, then one should increase investment in such positions. It is important to double down on winning investments and cut down on losing positions over time to generate outsized returns.
4. Stop benchmarking you returns with other investors or indices or other benchmarks constantly. While one should definitely benchmark longer term returns like over 2 years or longer, it is detrimental to compare 1 month, 3 months or even 1 year returns. Equity investing is meant only for long term as short term factors like volatility, liquidity, etc cancel out and only the business performance matters for delivering returns. So, one should be patient enough to allow an investment strategy to work out. Moreover, no investment strategy will work out in every market conditions. Every strategy is bound to underperform in different short periods of term. However, if the strategy is a sound one it will deliver healthy long term returns. So, one should avoid constantly benchmarking equity returns and be patiently invested.
5. Keep track of regulatory and technological disruptions that can structurally impair the fundamentals of any business. While it is important not to be bothered by short term factors, it is equally important to keep track of any structural change like regulatory disruption or technological obsolescence or permanent shift in consumer preferences that can permanently damage a business’s fundamentals. If that happens, it is important to exit that position immediately.
Note: The author is the Co-founder of Prescient Capital, a public market investment firm that aims to generate attractive absolute risk-adjusted returns.
(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)