Although the Nifty has recovered from 15,293 on June 17, 2022 to 17,530 on September 16, 2022, one may wonder about the path ahead.
Older investors may have experienced multiple cycles and formulated investment strategies that work for them. However, investors new to the market would seek clarity.
Here are 5 effective strategies for investors across the board to become successful:
1) Buy companies, not stocks
Investment decisions are often based on share prices. However, you don’t just buy stocks in companies you like; They buy companies whose shares are traded on the market.
For example, when Warren Buffett invests, he thinks he’s buying into a company that would still be successful if the stock market closed.
He focuses on acquiring companies with an amazing management team, brand equity and pricing power. Such companies may not seem exciting, but they are stable sources of cash that will increase shareholder value in any economic situation.
To better understand this, let’s think
. Look at the table below:
Between 2006 and 2011, HUL’s share price ranged. Investors would have experienced marginal returns during this period. However, HUL consolidated and from the second half of 2011 the share price started to rise.
Therefore, an investor who only focused on the share price and didn’t look at the underlying business would have sold the shares between 2006 and 2011 and missed out on the fantastic returns that HUL has offered from then on.
HUL net income doubled in FY11-17 and again in FY17-22 compared to meager growth in FY06-11.
2) Invest for the long term and let the compounding work its magic
A common mistake most investors make is trading and timing the market. Market timing is not possible when investing for the long term.
If you want to enjoy compound profits, time in the market is more important than market timing. See how spending more time in the market can help you grow your wealth exponentially.
From the table above, it can be seen that the longer you let your investment grow, the greater the value of the final corpus. Assuming your CAGR is 15%, your investment will grow 4x in 10 years, 16x in 20 years, and a whopping 66.5x in 30 years.
As most of us know
and delivered 34% CAGR (300x) and 24% CAGR (70x) over the past twenty years. They formed a lion’s share of the portfolio of top investor Late Shri Rakesh Jhunjhunwala.
He had started buying shares in Titan and Crisil between 2002 and 2003. This is a striking example of wealth creation through long-term investing.
3) Pay attention to diversification and asset allocation
Experts often talk about having a concentrated portfolio of 7-10 stocks. However, this may not be for everyone. A retail investor may be better off having a diversified portfolio of 20-25 stocks across different industries and market caps.
Second, you might not want to invest more than 8% in any one stock. A more practical allocation ratio is 3% to 7% per share, depending on risk appetite, goals, and other factors.
For example, various New Age stocks that hit the market last year have lost between 40% and 60% in the last year; So a 10% or more allocation to such a stock would have taken away 4% to 6% at the portfolio level.
Therefore, an approach that considers stocks across sectors, market caps, high-mid-low risk categories, growth and value will withstand the pressures of times of stress and generate healthy alpha and create wealth over the long term.
4) Start with any amount
Most people believe that it takes a large amount to start investing. That’s a myth. Whether you have Rs 1,000 or 1,00,000 and up, putting money to work makes perfect sense.
Wealth builds over time, not overnight. It takes patience and consistency to create wealth. But to create tremendous wealth, you have to start early.
For example – Ram invested Rs 10,000 when he was 25 and Ramesh invested ten times Ram or Rs 1,00,000 when he was 45. Both investments grew at a CAGR of 15%. By the time they both turned 60, Ram’s investment had grown to Rs. 13,30,000 and Ramesh’s investment to Rs. 8,10,000.
5) Get advice from qualified experts
There is no lack of information today. Aside from tips from family members, friends, or co-workers, it’s hard for investors to glean insights from the noise.
In addition to the experts featured on news channels, there are financial influencers who use the internet to share their views. In such a scenario, an investor may want to seek advice from SEBI registered investment advisors by paying a fee, rather than relying on recommendations from people who play no part in the game.
Investing is a journey and there are always new milestones to be reached and previously unknown insights to be discovered. However, the fundamentals of investment law remain the same and investors should focus on complying with them.
(The author is Chief Investment Officer (CIO), Research & Ranking. Recommendations, suggestions, views and opinions are his own. These do not represent the views of Economic Times)