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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Market investing is serious business, not adventure sports

Stick to basic investment principles. Be boring when it comes to investing

As I write this piece, I am once again amazed at the emotions and sentiment that rule the stock markets.

After soaring to new highs on election results day, the Indian market appears to have entered into a phase of consolidation. On the day the new Prime Minister was sworn in, ironically, chaos was the order of the day at the markets. National Stock Exchange’s Nifty swung over 230 points while the Bombay Stock Exchange’s Sensex gyrated by almost 750 points intra-day. And, the heavy sell-off in smaller fare resulted in the mid- and small-cap indices snapping their winning streak.

Investors once again questioned if the rally was on.

I am no expert to answer that question. There are many reports out there by various banks and brokerage houses giving varied kinds of targets to the index. Market gurus have been confirming that a new bull market has begun. But are we really in a bull market? Maybe we are, but that shouldn’t change your perception towards investing.

My advice always has been, and always will be, to stick to basic investment principles. Be boring when it comes to investing. If you want adventure, then take up a new sport like scuba diving or hang-gliding.

Here are my basic (and very simple, I might add) principles when it comes to investing.

Stick to fundamentals: I am sometimes amused at how investors take their cues from foreign institutional investors (FIIs). If FIIs display an interest in the market, then investors see it as a sign to be positive on equity. What they need to realize is that equity should be part of your portfolio irrespective of FII behaviour.

It’s not just FII behaviour, but general market noise and sentiment. Focus on what you are buying, and the reason behind it, not on cosmic forces beyond it.

There should be a logic behind your choice of funds: I always say this to mutual fund investors— start by looking at the various funds and see how they fit in with your risk profile. If you are risk averse, then avoid sectoral and mid-cap funds. Stick to large-caps instead.

If you do not start out with some basic premise on what your portfolio should hold, you will be easily swayed by fear during downturns and greed during bull runs.

Be smart about returns: Besides looking at the investment mandate of the fund, and its investing style, pay close attention to consistency of returns. A common mistake investors make is to bet on the fund that recently delivered the best performance. Don’t get swayed by the latest chart toppers—they will tumble as fast as they have risen. Chart topping performances are not easily sustainable.

Learn to sit tight: If you are easily swayed by what is happening around you, the casualty will be your portfolio. You will end up with a lot of junk and transacting too frequently. It is not necessary to constantly do something to have good investment success. If your fund is not doing too well but its investment mandate is still sound and you are convinced of the fund manager’s bets, then don’t just push the sell button. It could be that her investing style or the stocks she has picked are not being favoured by the market. For instance, if momentum stocks are calling the shots and your fund manager has decided to stay away from them, then obviously the fund will lag its peers. Conversely, if the market is chasing value, then a portfolio packed with growth and momentum stocks will be punished temporarily. It is no reason to exit the fund.

Let me close with a quote from legendary value investor, Benjamin Graham. The father of value investing had an iconic quote about the stock market. He said that in the short run, the market is like a voting machine—tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine—assessing the substance of a company.

The message is clear: What matters in the long run is a company’s actual underlying business performance and not the investing public’s fickle opinion of its prospects in the short run.

This statement has a lot of meaning for any investor. And mutual fund investors could well apply this to their strategy. Buy smartly, ignore the drama and hold for the long term. The investors who continued with their systematic investment plans all through last year and the start of this year will be one happy and content lot when the next bull run takes off. Take a cue from them.

Aditya Agarwal is managing director, Morningstar India.

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