“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. You only find out who is swimming naked when the tide goes out” – Warren Buffet.
The naming of Narendra Modi as the BJP’s prime ministerial candidate in September 2013 triggered a bull run in Indian stock markets that culminated with the BSE Sensex hitting an all-time high. The Sensex is up almost 44 per cent since then and in a span of 1 year, India has gone from one of the most vulnerable emerging countries to one of the favourites among foreign investors.
The big question after the sharp run-up is, what next?
There are a lot of quotes by various news agencies, investments experts and traders that the Sensex will touch 35,000 next year and 100,000 in the next ten years. Most of these opinions are framed by aggressive assumptions. The reality is that if you buy any asset, you are essentially paying a price and getting a certain value. There are varieties of macro and micro economic factors that can impact this value. If you are driven by opinions of news channels, you are basically ignoring fundamentals of how a company creates value.
Essentially, there are four pillars of value creation:
1. The core-of-value principle establishes that value creation is a function of returns on capital and growth.
2. The conservation-of-value principle says that it doesn’t matter how you slice the financial pie with financial engineering, share repurchases, or acquisitions; only improving cash flows will create value.
3. The expectations treadmill principle explains how movements in a company’s share price reflect changes in the stock market’s expectations about performance, not just the company’s actual performance (in terms of growth and returns on invested capital). The higher those expectations, the better that company must perform just to keep up.
4. The best-owner principle states that no business has an inherent value in and of itself; it has a different value to different owners or potential owners—a value based on how they manage it and what strategy they pursue.
Ignoring these cornerstones can lead to poor decisions that erode the value of companies.
Successful Investing takes time, discipline and patience. As residents of DLF5, you would agree that an investment made in DLF5 ten years back, has delivered exceptional returns. DLF imagined DLF 5 on an unprecedented scale of luxury and vision more than twenty years back and has created exponential value for all its stakeholders. [Be a part of the DLF5 lifestyle here ]
An intelligent investor will do his analysis, find out the true value of the business and then decide whether the asking price is justified. Anyone who does not follow this process is just speculating in the stock market.
So how should you go about it ?
- Once you have followed the process of valuation or got direction from your investment advisor, you can create an equity portfolio by using a core and satellite approach.
- At the core of your equity portfolio should be Nifty index and large-cap companies, comprising at least 50% of your portfolio.
- The next layer should have funds whose specific focus can be rewarding mid-cap companies, small-cap companies and value companies. About 35% of your portfolio could be invested here.
- The next layer should have companies that need an aggressive review. Not more than 15% of your investment portfolio should be part of sector focused micro-cap companies. These will do well seasonally and need close and constant monitoring.
At the end of the day, do not get caught up in the euphoria of a rising stock market. Before you invest any funds, do your own due diligence or consult an investment firm that can perform the analysis on your behalf.
Always Remember – It’s not about timing the market but about time in the market.
By Ankur Kapur
Ankur is a passionate believer in the Value Investing model for wealth creation over a long term. He is a CFA / CFP and co founder of FINQA – an investment advisory firm.
He can be reached at ankur @finqa.in or +91 98995 81185.