Stock markets can teach you a lot if you are willing to learn. In fact, it is the only place where the cowards have a higher chance of gaining than those who make aggressive bets on stocks and various investments. Many people share how they learn something new everything even after having spent an entire life in markets.
Vinay Paharia, Chief Investment Officer, Union Asset Management shares snippets from his prolonged career at the markets to underscore what investments in the market mean to him.
Paharia’s stint as a senior fund manager at Invesco Asset Management and as an equity research analyst at DBS Cholamandalam AMC, K R Choksey Shares and Securities Pvt Ltd and First Global Stockbroking Pvt Ltd explains his investing style and patient attitude towards finances.
|Mutual Funds managed by Vinay Paharia|
|Scheme Name||Category||Three-year returns (in %)|
|Union Equity Fund (G)||Multi Cap Fund||90.20|
|Union Equity Fund - Direct (G)||Multi Cap Fund||94.40|
You must regularly invest till eternity
By eternity, it surely does not mean parking money till the end of life. It simply hints at investing regularly and staying invested for a long period. Despite the clarity of this theory that underlines how people can create wealth from the market, many market participants are strangely oblivious to this simple fact. Stock prices continuously discount cash flows to infinity. This means that the effect of an event on the market is inevitable in the distant future too.
Don’t underestimate the importance of management quality
Undoubtedly, business quality is very important in the long run. Management quality has a lasting effect on any business’ long-term investment performance. This is evident in how high-quality companies outperformed low-quality ones over the period.
Quality refers to a company's ability to earn significantly higher returns on capital than its cost of capital over the course of its existence. This is possible only if a company has a material competitive advantage over its competitors.
A low P/E ratio indicates a cheap stock
There are many factors determining any company’s P/E multiple, the most important being
- Sustainable earnings growth
- Sustainable return on equity (RoE)
- Business risk
- Risk-free rate of return offered in the country
Some companies trade at low price-to-earnings (P/E). The reasons may be many of which a low potential for future growth and low RoE is the most common. Companies with higher P/E ratios are more likely to earn profits and grow in strength both in the short and long run. This is why investors must be wary of putting their money only in companies with low P/E ratios or base company valuations based on these figures.
Growth without enough RoE is futile
Not all expansion is beneficial. Some businesses are growing quickly by consuming a greater proportion of their capital, which is poor growth. The market only rewards companies that are growing quickly while maintaining returns on incremental capital employed that are more than their cost of capital.
Avoid stocks with high RoE but without growth
Growth without an adequate RoE is bad. Similarly, companies with high RoEs but limited opportunities for growth are rated low by the markets. Many businesses that used to have good RoEs but are now facing disruption in their businesses fall into this category.
Crowd behaviour is ubiquitous
Crowd behaviour and sentiments have not changed for many years. The attitude of investors towards the stock markets remains the same despite years of learning and experience with their volatility. Crowds are always bound to succumb to the alternate tendencies of greed and fear that markets offer from time to time. This is why behavioural investing is becoming more popular among investors.
Investing can be boring
Investing is not a side-line activity or a get-rich-quick scheme. Investing is about allocating capital while expecting to receive a considerable return or profit on it other than the original capital, over a period. Any attempt to spice things up by trading in and out of securities or through speculations can have a negative impact on an investor's overall performance.
Investing is not a game or a gamble wherein you put your money in hoping for immediate returns. You not only put in adequate capital but also have to wait for a prolonged period. If you are looking to create wealth or achieve your financial goals on time, there is no way you can do it without parking your funds into equities. However, you must exercise considerable discretion while selecting the right kinds of stocks or sets of investments.