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Home >Markets >Stock Markets >Zerodha founder explains – Finding the right stock or sector in today's market

In a raging bull market like the current one, it is counter-intuitive for one to think about going wrong with one’s bets, as everything seems to have the potential to make money. Such a market environment usually brings in complacency and participants shun caution to make the most of the situation. It is during these times that a nuanced approach comes in handy to come out better than the crowd.

 A common theme that I have noticed across the course of the last financial year is the disparity in performance among constituent stocks of the same industry. Post the market crash in March 2020, the rally might appear to be broad-based from the perspective of the benchmarks. However, when analysed closely there has been a considerable gap between the performance of sectoral peers. While it is difficult to pinpoint the reasons behind this phenomenon, the gap in returns could possibly be accredited to fundamental reasons, depending on industry to industry. To give you some perspective, at the start of the last financial year, Tata Consumer Products was trading at around 280 while Marico was trading at 265. By the end of the financial year, the former was at 639 whereas the latter was at 412. Tata Consumer Products returned 117% over these 12 months as compared to Marico’s 50%, and the FMCG index did around 27.5%. With identical market capitalization and industry, a slight miss in choice would have panned out extremely differently for an individual.

 The second bit is on valuations, perhaps the most talked about topic in recent times. As markets are on a rise, it is natural for stocks to get expensive, primarily gauged by trailing P/E ratios. Growth stocks continue to compound investors’ wealth while being expensive. We have had instances in the markets, where a high P/E stock has posted a better price appreciation, year-on-year in comparison to low P/E stock. It is important to understand the specific business dynamics of a company and should be prioritized alongside sectoral or macro indicators. The idea is that the company must have the backing of key fundamental drivers that would sustain its valuations, even when the markets are not doing well. Those fundamental drivers will be more stock-specific in nature and hence more focus should be towards specific selection.  

 Lastly, from the perspective of volatility. For someone to protect their investments, it is crucial to consider the sensitivity of their portfolio stocks with the markets. The reason being that when bull markets plateau, it is the high market sensitivity stocks that tend to correct the most. Undertaking risk without proper understanding of the scenario is a recipe for disaster. 

 To wrap this up, retail investors should focus on capital preservation and not get too expansive with their investment bets. No doubt that equity markets have become a fairly viable asset class, especially against the current trends of high inflation. Having said that, over-indulgence in already overheated markets should be avoided at all costs. Acting in line with your risk appetite is important. Being blind to risks at this point is the easiest thing for one to do.

*The article is authored by Nikhil Kamath, Co-founder, True Beacon and Zerodha.


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