We are undergoing a massive correction in the prices of stocks right now. This was long due considering the ceaseless rally we enjoyed in 2021. Vinit Pagaria, Head - Data and Research, StockEdge shares with MintGenie the intricacies of stock investments and what factors would help investors to stay put amidst the recurring volatility in the market.
Q. Small-cap and mid-cap stocks have fallen more as evident by the Nifty Small-Cap and Mid-Cap Indices. Large-cap stocks have not shown so much growth either. With so much volatility around, how do you advise your clients to choose their stocks for investments?
Nifty has corrected by over 18 per cent since Oct 2021 while Nifty Midcap 100 and Nifty Small Cap 100 indices have seen a sharper correction of almost 25 per cent and 34 per cent respectively from their lifetime highs. However, one should be cognizant that this correction has come after a sharp rally since March 2020. A decline in stock prices helps investors to enter into quality businesses as the valuations become reasonable. There are many quality businesses that had become very expensive earlier but now the valuations have cooled off after the recent sell-off.
Q. Most analysts advise against buying sectoral and thematic stocks. However, not all stocks perform well all the time. Sectoral stocks do yield considerable returns after a point in time. Then, why not invest in them and hold them like other investments?
Sectoral and thematic stocks inherently carry a higher concentration risk and are suitable for investors with some risk appetite. Nevertheless, if the investments are made at the right price point, they reward investors handsomely. For investing in sectoral stocks, it is important to understand the sector as a whole and the kind of headwinds or tailwinds that are likely to shape up in the future. Investments should be diversified across multiple themes and entry into individual stocks benefitting from a particular theme should be done based on a holistic bottom-up approach and at reasonable valuations.
Q. Not many investors understand macroeconomic factors influencing stock picking and buying. How do you advise them to invest in stocks then?
There are only two options available to investors who currently do not understand the dynamics of equity investing –
a. Learn continually through a mix of theoretical and practical understanding through the use of relevant, filtered, and noise-free data and analytics, and
b. Invest through mutual funds or other avenues like Robo investing. Every investor must have a clearly defined return expectation from the portfolio and should be equally aware of the risks emanating from the same.
A high return is possible only with a high risk, but a high risk doesn't necessarily ensure a high return!
Q. Many people enter the stock market to earn decent returns. But, not many know when to exit. According to you, what should be the entry and exit strategy for investors?
When investing in equity markets, investors need to be aware of the investment time frame and should have reasonable return expectations that are not based only on recent historical returns. Eventually, stock market returns follow the profits the businesses generate for the investors. For a long-term investor who is looking at wealth generation, investing in quality businesses at reasonable valuations and regular monitoring of the same is good enough. An active investor needs to be more aware of the short-term triggers to the economy, sector, and company at large. Along with the fundamentals, the sentiments also drive prices in the short term and the investor must factor in these beforehand.