Are indian equity markets khatarnaak?

Indian equity markets for long have been viewed by a majority of retail investors as a dangerous proposition wherein most probable outcome is of investor loosing money. There are investors who have made great fortune over the years by investing in equity markets by following ‘Buy and Hold’ strategy in fundamentally strong companies. There are companies which have come and perished but such investors have been able to make timely exits as well. But percentage of such investors is still very miniscule. So why large chunk of our population still think markets to be a dangerous destination when it has so much opportunity to create wealth for investors ? Let’s look at bright aspect first.

Are things changing?

Lately things have started to look up. With record inflows moving into Indian markets through mutual funds, thanks to retail investors – it is a landmark change. What is much more heartening to see is that during demonetization, retail investors unlike previous instances have poured more money into mutual funds rather than redeeming them. Slowly but surely, an average retail investor is looking to invest systematically through systematic investment plan to achieve long term goals. Stock market never moves in a straight line but now investors are willing to digest volatility in lieu of achieving their long term goals.

However roping in more investors is a work in progress if you consider percentage of total population who invest in equities. So what still stops an indian investor to invest in equities……

“Share baazaar ekk khatarnaak jagah hain”, one of my friends confidently said in a rather stern voice while we were just settling down for our morning tasks at office. He’s 26 when ideally investment journey begins. “What’s so khatarnaak about it? Have you lost money in stock markets?”, i asked promptly. “Yes i invested in a construction sector company  4 years back, 70 ka 7 rupai reh gaya”, he said. I promptly asked “who asked you to invest in this stock – it was under huge debt 4 years back also and only way it could have gone is down”. “Friend ne bola tha” , he said promptly. I replied, “You yourself answered why you lost money” ending the conversation….

Few more perspectives…

Earlier in the week i had another discussion with one of my colleague at office during lunch. “Markets mast chal raha hain, meine XYZ company mein invest kiya hain aaj. Mere pehle investment hain”. I congratulated him on starting his journey in Indian equity markets but asked hesitantly  “Mutual fund se invest karna shuru kyon nahi karte? Pehle investment hain”. Promptly he replied as if expecting such a question, “Mutual funds bahut boring hain – bahut time lagaate hain”, he said. I said “A balanced fund such as BSL balanced 95 fund has delivered 68 times return in 22 years – kam hain kya? “. There was silence all around and that was the end of conversation. Some times we assume certain things which can be detrimental for us in the long term. Numbers speak louder than words.

Investor Categories

As time to time i meet and ask my friends about their perspective towards Indian equity markets, i came across following category of investors (speaking broadly):

1)There are investors who have made huge profits from their first trade/investment followed by huge losses down the line, now sitting at 30-40 stock portfolio with majority being penny stocks – total portfolio in jeopardy.

2) There are some who  started with losses but eventually made profits learning from their past mistakes. They have grown mature as an investor over time and are doing good job.

3)There are investors who still are holding on to their stocks/mutual funds irrespective of it making losses because of non-acceptance of the fact that their stock/mutual funds selection went wrong. “Aiyegaa ekk din uparr, dekhna” is the favourite tagline.

4) There are also smart investors who are investing systematically in good stocks/mutual funds via SIP since beginning completely focused on their long term goals and taking market volatility in their stride.

5) The last category are of ones who have always envisaged equity markets as a gambling place with all their money stacked in FD’s, PPF, insurance policies, real estate. ” Naah bhai nahi – marna hain kya?”, one of my friends replied.

Which category of investors do you belong to? Do share your story with us in the comments section.

Are Indian equity markets khatarnaak?

Are Indian markets khatarnaak? No, sometimes we as investors make it by investing in stocks without doing due diligence. Investing in equities is a must in the long run to beat inflation and meet your long term goals – that’s a fact. More time you have in hand i.e. early you start investing , more systematic you can be to achieve your goals. There won’t be any desperation to invest randomly to generate returns somehow.

So how does an investor start about investing in equity markets?

Mutual Funds is the answer…..

To some investors, they sound boring or take time to create wealth but they are one of the best investment vehicles to create long term wealth systematically. By investing systemically and getting benefit of power of compounding  – they can make your long term goals achievement a cakewalk. We won’t be going into the details of which mutual funds but balanced funds are always good starting point.

What is a good business (stock) like?

Another query normally investors have

  • what is a good business (stock) like?
  • I invested in XYZ company and lost money.
  • It is impossible to track a secular growth story

As a novice if we think what can be a good business to invest in? ( i don’t like the word ‘stock’ because as an investor you are always investing in a particular business, thus you are owner of part of the business – in good as well as bad times)  – Simple answer would be  companies with excellent rock solid fundamentals, transparent and progressive management, less debt, generating good cash flow, markets leaders in their respective line of business, investor friendly etc. etc. That is basic common sense. You shouldn’t be having a finance degree to reach to such a conclusion.

That’s ok but then how can i know about such companies? – Let’s take an example of a ‘banking sector’ – which banks we think will have more growth going forward – Private Sector Banks or public sector banks. What would be one’s answer?

Obviously private sector banks which are very aggressive as regards all the banking aspects and broadly have well laid of processes before lending. This is not a secret. We all know it till PSU’s bring in efficient management to turn things around.

Next – which private sector bank – there will be few names which are obvious ones. An average investor will point out that till now it was a simple categorization of public vs private sector banks. Real problem is we don’t know any internals of how a banking sector stock is evaluated. No problem…

Let’s check out returns of leading private sector banks if investor would have invested in any of them five years ago:

Bank A – 180.16%, Bank B – 56.49%, Bank C – 347.21%, Bank D – 213.99%, Bank E – 368.28%

(Data Source: Moneycontrol.com – 2nd May 2017)

Barring Bank B, all banks have given decent returns.  As an investor in Bank B, you would have gauged easily that bank is reeling under NPA stress after analyzing their quarter numbers consistently over several quarters and it was a no brainer  to switch your investments to another bank in private banking space. How you can loose money here?

So are there any predictable secular growth stories?

Banking sector taken here is just an example for reference purpose. There are some secular growth stories in each sectors which are not too hard to find. Even in financial crises, these companies have shown exemplary resilience and have come back strongly with same vigour. Last 5 years is only one data point but fact is that good businesses stock price can go down due to turmoil else where in world but they will come back equally strong while there are fundamentally weak businesses who are still to touch pre 2008 highs, maybe they will never.

Companies which are leaders in sectors such as auto car, paint, auto – LCVs and HCVs, food processing, chemicals, private sector banks, tyres, auto ancillaries, IT, 2 and 3 wheelers, lubricants,housing finance have proved to be great wealth creators over the years. As an investor if we analyze these businesses, we will find quite a lot of similar characteristics which make up good businesses. Why we don’t invest in such great businesses in first place? Are they too boring? I have yet to meet any investor holding 500 shares of a leading retail oriented private sector bank in the portfolio which has been doing great job of generating returns for investors for close to 2 decades now.

So as an investor we should always have a focussed approach as to what kind of risks we are taking against what kind of return we can expect. Shouldn’t we first absolutely seal long term profits in businesses which are excellent ones and are likely to growth over the long term? High risk doesn’t necessarily means high returns.

One of my close friend started investing in a retail oriented private sector bank which has retail focus and lazer sharp focus on NPA’s. Quarter on quarter retail base has increased and NPA’s well under control.  What has he done now? – having followed it for few years and since bank is progressing well – started equity SIP there.One of his other investment in leading NBFC with excellent management and a market leader with innovative offerings, quick technology adoption and focus on customer service – invested few years back and holding it with 260% add return at the moment and is adding still. Going through news around government push for affordable housing and analyzing diligently about government policy in this regard, he analyzed all companies in this space offering loans in 15-20 lakhs growing at 40% add with great NPA control – invested in one such stock each month. The stock had a great run in the last few years.

I asked him what’s the secret of his investment success – he said ‘Simplicity’ (investing in simple businesses you understand) and ‘Consistency’ (investing consistently in them ignoring the noise).

Bottom line: Investing sometimes is not difficult as it is made out to be.

What rules retail investor should follow for Indian Equity Markets not to be ‘khatarnaak’ to them?

Discipline in investing is the success mantra as it is in any other field. Investing every month is always beneficial without any extra strain on your monthly budget. You can have an equity/mutual fund SIP in good businesses/funds and keep on averaging out the cost price. In the long term, this strategy of investing at regular companies can reward you with huge wealth creators in times to come. One should increase you SIP amount as your income increases.

Check-list while investing in equity markets

I have summarized some of my learnings below which may be beneficial for our readers:

  1. Keeping investing through SIP in good businesses/mutual funds to average out the cost over the long run.
  2. Don’t go for direct stocks to invest once you being investing in equity markets. Start with mutual funds. Mutual funds are excellent vehicle to invest in to achieve long term goals.
  3. Looking for growth oriented companies which have done well because of their sound management, growth oriented outlook, exemplary execution and ability to change with time. A leading paint company is one such example.
  4. Look for sectors wherein industry players are less and competition is not that intensive. For example, paints sector has room for everyone to grow.
  5. Even if there is a hint of company financials not being transparent – get out of the business. Trust is something which takes years to develop but seconds to break. Company financials should have no irregularities.
  6. Don’t look for businesses which have already grown and not much scope to expand due to their sheer size.
  7. Don’t be mistaken by trading stocks as investment stocks. Companies with deteriorating fundamentals can be good trading stocks but never be investment stocks.
  8. Look for companies which have less dependence on overseas operations and more domestic theme oriented. For instance, a leading domestic car maker can be preferred for obvious reasons.
  9. Where NOT to invest is as significant as to where TO invest.
  10. Don’t be in a casual mindset while investing. Be as focussed while investing as you are while on the job everyday.
  11. Do remember you are the one responsible for your investments. Don’t close your ears to suggestions but take decision as to where to invest only after your thorough understanding, research  and conviction.

Few More Pointers…

  1. Invest in equities is a MUST to beat inflation. That’s a fact.
  2. Power of compounding is phenomenal. So understand how it works- only then you will admire it.
  3. Buy good companies and hold good quantity of shares for long term. Don’t be in a frequent buy-sell mode. It looks exciting but most happy person is your broker and no one else.
  4. Do remember, volatility is investor’s BEST friend. Don’t be afraid of it.
  5. Invest in ELSS funds in case you need to save tax under Section 80C and your investment horizon is long term.
  6. In case you want to invest in stocks, you can make virtual portfolio available at various leading financial website to get a sense of how you would have fared had you actually invested. Learn from other’s investment mistake and you don’t necessarily need to make one.
  7. Read lot of good investment related books. It helps.
  8. Sometimes ‘buy and forget’ strategy in good companies can do wonders. Investors who would have bought great stories during IPO’s and turned passive post that would have been a happy lot today.
  9. Make sure you have proper nomination in your demat account and other investments as investment in equities can be for a really long time.
  10. Stay away from companies which take too long for investment in capex to materialize.
  11. If you have made good gains in a particular stock, don’t stop there but keep investing in good businesses. You are here to create wealth and not money. You don’t have to sell a stock just because it had made money for you.
  12. Don’t invest money which you need in short term in equities.
  13. Do remember stock market will not move up in a single line. There can be period of no return for years and then phenomenal in a particular year. Being patient and being disciplined do help.

Few more….

  1. Markets always gives you opportunity to buy great businesses at low price. Such instances are less and as an investor one should grab it with both hands. Scenarios such as 2008 financial crises, Brexit or Demonetization are good times to invest but only in fundamentally strong companies which will eventually bounce back.
  2. Markets always factor in growth or de-growth in a sector much before that actually happens. For example, upside in stock prices of companies which were beneficiaries of low crude prices actually happened much earlier and now slow down in I.T is also already factored in the stock price.
  3. Don’t be emotionally attached to any stock. If there’s a hint of fundamentals deteriorating, don’t hesitate to get out.
  4. Selling a stock is as important as buying a stock.
  5. Don’t over diversify across various stocks. Big portfolio don’t mean big gains.
  6. Stay away from over leveraged companies even though they may give good returns for some time due to market sentiment.
  7. EXEMPLARY DISCIPLINE AND PATIENCE ARE VIRTUES OF A GREAT AND SUCCESSFUL INVESTOR

Do you have a story to tell about your investment experience in Indian equity markets? Do share with our readers in the comments section below.

Happy investing..

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Disclaimer: Above article is for investor education purpose only. This article is my experience with equity investing and there is no recommendation here for any financial product. Please consult your financial advisor before taking any financial decision.

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