Posted On Monday, Aug 24, 2015
We have all heard the story about the hare and the tortoise. The fast talking hare gets outwitted by the slow and steady tortoise simply because he did the basics right and was not complacent.
We are told right from childhood, that it is the tortoise which is to be idolised for his discipline and work ethic and not the fast running, fast talking, take it easy hare. However, when it comes to investing in equities we see investors behaving contrary to the sage like advice received right from our childhood. Most investors, I meet still perceive equities as a get-rich quick scheme. The higher the market rises, the more they are keen to invest, hoping to cash out before any correction. Building a steady portfolio for the long term and patiently waiting for good companies to come at a price where it offers great value is too boring. Most of them are in search of stocks which can double over the next six months, if not earlier.
Given the volatile nature of the markets, building a steady portfolio on one’s own becomes a difficult task. By way of an example, today at the time of writing this article, the S&P BSE Sensex has fallen by more than 1,000 points, amidst worries about the Chinese economy. There could be times where the markets could shoot up too, therefore it becomes difficult to predict where the markets could go.
This is especially evident in recent times. A host of midcap and small cap stocks with shaky fundamentals have rallied 10x over the last two years, but I still see very little scepticism, questioning the rally given earnings of most of these companies have either headed lower or shown only marginal improvement. Why should the same company, which was available at one tenth the price two years ago should now be purchased at such high valuations; without any corresponding improvement in cash flows or profitability is not a question investors are bothered with (while they should be!).
In fact, most investors are looking to buy more and hoping to make a quick buck. We all know just how this story will end. Ask investors in China who went through a very similar phenomenon just a few months ago before it came to an abrupt end.
At Quantum, we continue to do the "boring" things when it comes to investing in equities. Our research analysts continue to meet companies, understand ground realities and build valuation models based on facts. Our Buy and Sell limits are based on underlying cash flow and profitability projections. If a stock comes to our buy limit, it will be added to the portfolio else we continue to remain patient. We believe managing downside risks remain cardinal in equity investing.
Hopefully just like the tortoise, our steady work ethic and disciplined process allows us to deliver steady returns to our investors over the long term and allows them to reach their financial goals. Thus, at least as far as equities are concerned, its best to be boring and careful for your long term investments, rather than being rash and trying to make a quick buck.
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