You cannot stop circumstances from happening be it the dot-com bubble, the gut-wrenching 9/11 terrorist attacks, the sudden toppling of the market due to the global financial crisis, constant deflation, rising crude oil prices, demonetisation and the unforeseen attack of the pandemic among many others. These incidents have jolted the financial markets with increased ferocity every time and with high regularity. However, nothing could stop Nifty from taking a leap from its unprecedented bottom of 7600 to 10,000 within a few months. The secret lies in the strong fundamentals of the companies that make up this index and continue to propel the movement of the index for the National Stock Exchange.
What makes these businesses stick?
Look at most of these successful businesses that bounce back post a big fall, and you will realize the effect of an enduring moat that keeps them shielded against extreme market jolts. There is no single definition of moat as every investor views it differently. The market veteran Warren Buffett explaining his interpretation of moat said, “You should invest in a business that even a fool can run because someday a fool will.” It is the creation and presence of a moat that explains the rise of some plain vanilla companies to reputed industrial names in different sectors.
Navneet Munot, ED & CIO, SBI Funds Management shares that the ultimate moat of any company is its management. Munot explains to Value Research how the different aspects of management including capital-allocation track record, risk management and accounting quality can be measured. Other factors affecting the moat of a company necessitate a more subjective evaluation like fairness in dealing with stockholders, an innovative mindset and adaptive to market dynamics.
Munot maintains that amidst all the bustle and chaos surrounding us, it is the quality of management that matters. Irrespective of the issues that may rock the stock market from time to time including climatic conditions, natural calamities, border skirmishes, constant threats of war, downgrading of ratings and other factors that may lead to a sudden slowdown, the resolve of many Indian companies’ stands solid.
Add to these macro woes, the sudden focus on disruption, consumer behaviour, excess dependence on technology, etc. have at times hit the market hard. However, despite all these, there is always an inherent hope for normalcy to return or seek opportunity in this chaos. It is as if Indians know that there would be light at the end of the tunnel, so all they do is make the best of this recurring dark phase by culling out stocks with good fundamentals and investing in them at much lower prices.
To rethink and reimagine
The human mind is capable of anything, and that is what the management of a company must essentially do. It must rethink strategies to put the company back on its track or reimagine possible solutions in a way that can give wings to its business. More than a company’s size, it is its agility that matters. Flexible management will take no time in turning around its fortunes. Nimbleness is the key to a company’s success more than its market size.
Innovation coupled with research and technology will create everlasting advantages that would further lend them a competitive streak. Planning helps, but the management must be ready for feedback too. Often the solution to a problem lies within it, which is why feedback helps.
Look for the best talent
Technology cannot beat talent, and that is why companies hiring the best talent score above others in the long run. The work-from-home norm has dented the edge of most employees, which is why reskilling them is of utmost importance. A fair attitude is the ultimate winning tool, so companies must treat all their shareholders fairly.
How do we invest?
We invest in companies. During these times of continued volatility, we must be able to find out the winners. It is like separating the wheat from the chaff. Like the management of different companies, we must evolve too, and that is why we seek the help of various technology tools like quant, artificial intelligence, forensic accounting and so on. These tools complement the traditional way of analysing the fundamentals of companies before we invest in them. This, in the end, will create long-term value for equity investments.