The Hindu Business Line : `The disciplined, not the flamboyant, make money'

Have patience, evolve your own methodology, buy a company and remain with it, even through its low periods. -- MR SANDEEP SHENOY, STRATEGIST AT PINC RESEARCH

Mr Sandeep Shenoy

The last two years have been excellent for the Indian economy, raising people's expectations and giving them a feeling of invincibility. This year could be one of flux and the stock market could remain stagnant or move sideways for three to six quarters, says Mr Sandeep Shenoy, Strategist at PINC Research, Mumbai. "But just because the market is in a sideways mode you can't pull out all your money and put it in a bank FD at 10 per cent return."

Bank fixed deposits are not bad and "the interest rates are attractive now, but your decision will depend on which curve you are in, as an investor. If you are at the top curve and 45-50 age group, it makes immense sense for you to safeguard your capital and not have a maverick or a cowboy investment philosophy and lock your gains. At 10 per cent minus 6 per cent inflation you still make a gain of 4 per cent, which is not bad."

Many options for the young

But he thinks that for young and savvy investors "bank FDs are a juvenile form of investment. Fixed Maturity Plans of mutual funds gave better returns in March." Today's investor has several options. One is real-estate and in "most of the metro clusters real-estate gave unbelievable returns which even the hardened investors hadn't anticipated."

But he concedes that not too many Indian investors have the huge sums to buy real-estate and "top class speculators, punters or very niche investors have cornered that option. Most of us buy real-estate for self-consumption or long-term investment or a hedge." He adds that 10 years ago the profile of a person buying real-estate was 40-45 years. "But today young investors can buy it, thanks to higher incomes and home loans. But, of course, the jackpot returns of the last two years might not be there now."

Well insured

One of the other "hard assets" that preserves capital is gold, but before anything else, Mr Shenoy advises youngsters to go for a "very long-term life insurance coverage" as a de-risk device. "Never look at insurance as investment; most Indians do so, reasoning that they will be alive to see the gains. That's the wrong way of looking at it. It is something that will insulate your family if something happens to you. And that's why it is called insurance."

At 23-24, if one works out a "fat cat" life insurance cover, the premium will be low, and if you are earning Rs 5-6 lakh put in Rs 50,000 on the premium; at 35 the premium could be three times higher.

Having done that and kept some liquidity, and even some amount in FDs, youngsters should look at equity, giving it the highest weightage for "supernormal" gains. "The trick is to get the right mix of stocks and hard assets, even though the concept of gold as a hedging, investment or liquidity management instrument is not there." Those in their 50s would have seen hardship "which many of today's youngsters can't even imagine. Gold helped families to sail through bad times, and bank loans were not easily available as now."

So how do you select what stocks to buy?

What to buy

"People draw charts saying if you had bought Infosys or Wipro at this price you would have been a multi-millionaire. But how many held on to these? Discipline and long term are two different things. Most Indian investors would have owned Infosys or Wipro or Reliance at some point, but must have booked profits long ago."

Keeping an investment time frame, he says, is a critical factor that separates a long-time investor from a short-time punter. "When they begin, everybody thinks they'll be long-term investors but when people see a supernormal gain in a short time... suppose you had seen 200 per cent gain in Infosys in a few months, would you have held on? After all, we are all humans and susceptible to the same set of emotions. When you try to latch on to a story at an early stage, you should go for long term."

Get the right mix

He says an investor should have a "mix of stories" — catch a good company or sector at an early stage and also buy larger companies that can give more predictable, decent returns. He thinks today the "nascent industries that can give you jackpot returns could be a pharma or a life science company or a biotech or a non-IT technology company or plain fuddy-duddy cement or steel companies that are scaling up. When you invest for long term, keep about 30 per cent of your investment in discovered stories that can give you visibility over the next two-three years. It could be an NTPC, Infosys, Reliance, or ICICI Bank. These have a demonstrated track record and have not failed despite glitches in the economy in the last 10-20 years, and given decent gains."

At the other end, look for companies that are scaling up; a cement or steel company that plans to move from 6 lakh to 6 million tonnes over a year. "Tata Steel and Gujarat Ambuja will give you good returns but at the same time a Sagar Cement or Jayabalaji Steel might give you an even higher return, being on a capex drive. At a younger age you can take a calculated risk on such scale-up stories, and later shift to the other two."

On whether youngsters should go directly into equity or through MFs, Mr Shenoy says both are good options, but "at least once a year you have to open your balance-sheet and check how much risk you've taken and what profit or loss you've made. It is not the flamboyant who make money but the disciplined. Each investor must have zeroed in on a strong story at some point, but indiscipline would have been his largest enemy, not the disability to spot a winner."

Have patience

So have patience, evolve your own methodology, buy a company and remain with it, even through its low periods, "because every company goes through a period of under performance. Take it in your stride; after two years of flat growth, when the ramp-up happens, you'll get huge gains. It happened in auto-ancillary, engineering and construction companies a few years ago. So have patience to wait out. But do youngsters listen? "Rarely; deep down, we all see safety in numbers so the herd mentality takes over." Resist the urge to sell when the market tanks and to buy when it surges; and never forget the old saying: `Markets can remain irrational for a longer period than you can remain solvent', he adds. So remain solvent, never go beyond your capacity by leveraging or over diversification; find the right balance at the right age, is his advice. At some point your discipline might make you look like a fool, but you'll win in the longer term.

Also, remember that you'll make some mistakes. "If you go by the archival view of most fund managers, savvy fund managers managing multi-billion-dollar portfolios have said that Bharti Tele has no future in India. But Bharti became a Rs 1,50,000-crore company; those who sold it missed one of the biggest value creation stories of recent times."

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