‘If you are investing in stock markets, ask yourself two questions’

A promoter’s honesty and their ability to allocate capital sensibly are among factors that Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers, looks for while deciding where to put money in the equity market. Edited excerpts:

What is the investment strategy that investors should follow while approaching the equity markets in the current environment?

What we have continued to do is to focus on three factors. The first is to look at the promoter. An honest promoter who does not indulge in any misappropriation of funds is what we are looking for; otherwise, we steer clear of the company. The second factor, beyond the integrity and beyond the cleanliness of the promoter, is whether the promoter has over the last decade demonstrated that he is capable of allocating capital sensibly. The vast majority of Indian promoters do not know how to allocate capital sensibly and therefore is an important criterion for avoiding a large swathe of Indian companies.

The third criterion, other than integrity and capital allocation, is that we look for monopolistic franchises and dominant franchises. The franchises that are charging 20-40% premiums in terms of prices and yet not a single customer wants to leave them, need to be identified. These are the three factors we continue to focus on and invest our client’s inflows into these franchises. We were getting inflows six months ago, a year ago, and even now we continue to receive inflows. We keep investing these inflows into franchises that are clean, competent and monopolistic.

This criterion has worked in all environments—before covid, after covid, before the global financial crisis, after the global financial crisis, before the Federal Reserve started hiking rates and after it started hiking. The macro circumstances have no bearing on our investment strategy.

What is the timeframe that investors should consider while investing in equities?

A lot of people jump into stock markets without knowing whether their money is suitable for the stock market. Whoever is investing in stock markets should ask themselves two questions. Firstly, is this money that I can forget about for the next three years? If you need that money anywhere before the end of the next three years, you should not be going near the stock markets. This includes borrowing money or using margin funding. If you need the money in the next three years, you should be investing in FDs, bond markets, government securities, and so on and so forth.

The second criterion is if you do have money set aside for the next three years, you should ask yourselves, am I investing into stocks which can get me at least a 20% compounded return over the next three to five years. If you are not investing for compounded returns of 20% over the next three to five years, you are not covering your cost of capital meaningfully. Most people I know won’t be able to hold their nerves if the stock market sees a significant correction and therefore, they may not be suitable for the stock market. A lot of people who are coming to the stock market have the wrong sort of money (i.e. they can’t leave the money untouched for three years) and the wrong sort of risk appetite.

What has driven investments into the markets over the last few years?

If we look at data that has come over the last 6-7 years from Securities and Exchange Board of India (Sebi), the Reserve Bank of India (RBI), and from Insurance Regulatory and Development Authority (Irda), it is pretty clear that Indian households are financializing their savings across age groups and across socio-economic strata.