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Avoid over-valued stocks

August 17, 2004 10:05 IST

Part I: Strategies for small investors
Part II: More strategies for small investors

In the concluding part of the series, Business Standard spoke to investment managers from brokerage houses on what strategies small investors should adopt.

The common thread was that they must avoid investing in over-valued scrips and build investment portfolios with a mix of fair-valued and under-valued companies, with the latter forming a major component.

They said small investors are better off using the services of a professional fund manager (read mutual fund) and must not look at making a quick buck but instead opt for long term investment.

Nimish Shah, director & CEO, Parag Parikh Financial Advisory Services Ltd:
The word 'small investor' is a misnomer. Investors have to be classified as 'active' and 'non-active' and not 'small' or 'big'.

An active investor is not the one who constantly churns his portfolio - he is the one who makes investing a profession or ensures that his investments are monitored. So, even a 'big' investor can be 'non-active', while a so-called 'small' investor can be 'active'.

Current valuations in many stocks hold good promise over 18 to 24 months. Investors can also look at select dividend paying stocks, where a portfolio of 10-12 good quality stocks can easily give a dividend yield of 4 to 5 per cent every year.

With a very good chance of capital appreciation. Investors should also look for companies where valuations are at multi-year lows. One has to identify one or two good companies with a strong balance sheet and management to weather the storm.

It is important for a portfolio to have some investments in such value stocks vis-a-vis only in 'growth' stories as the former will prove to be a 'kicker' to returns.

Nandan Chakraborty, head - research, Enam Securities:
Asset allocation is the key to successful investing - not too much into equities and not too little as well. Second, a time horizon should not be too near so as to be uncompetitive and not too far as there are many variables which may disturb the initial thesis of investing.

In choosing companies, look for sustainable edges in product/ service quality, capital efficiency, and value systems.

Micro-factors such as information from competitors, suppliers, ex-employees, which will get you fetch you more multi-baggers than looking at macro-trends.

Macro trends, whether in stock prices, economy or industry figures, make themselves evident much later than micro trends, and are expounded mainly by people who extrapolate from the past. After all, markets have remained flattish for a long long time, and in this decade itself we have had so many large multi-baggers.

Raamdeo Agrawal, joint managing director, Motilal Oswal Securities:
Investment guru Benjamin Graham in his book 'Intelligent Investor' said, "to achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."

The point is that people look to achieve superior results without actually having superior tools to achieve it. Small investors should look to invest in equity through mutual funds or professional wealth managers as far as possible.

Professionals devote all their time in the market and are clued in to the activities of a company they are investing in and also the ground realities of the market.

Investors would find it difficult to put in the same kind of research. More the research, better the conviction and better the understanding of value. Investors must learn to move away from popular opinion and look at valuations before investing.

They must avoid investing in over-valued scrips and look to build investment portfolios with a mix of fair valued and under valued companies, with the latter forming a major component.

Sushil Shah, managing director of Sushil Finance:
The question we've tried to address is how you can participate in the ongoing growth of a global economy without taking undue risks.

Our answer: A disciplined, long-term approach to equity investing that factors in the occasional and inevitable market crash while holding firm to the belief that factors driving stocks today will continue to create wealth in the years to come.

It begins with our own version of "value" approach -- buying well-researched stocks that are relatively cheaper to their peers, based largely on earnings and earnings growth. It relies on both statistical analysis (derived from the historical behaviour of stock prices) and a more subjective look at factors driving a company's performance -- things such as management and competition.

Once the picks are made, we advocate the buy-and-hold method of investing as the best way for most people to capitalise on the market's emerging trends.

Ambareesh Baliga, vice-president, Karvy Stock Broking:
Investment strategies can't be dictated. Every Investor has to develop his own strategy or style of investment. A small investor firstly should put a large portion of his investments in fixed-income instruments unless he is a veteran and understands the risks very well.

Even in the latter case I wouldn't suggest exceeding 60 per cent of investable surplus in equities. Then he needs to decide on his objectives - whether he would prefer to invest or be a trader.

As an investor look at medium-to-long term investments in sectors which he can understand. To say "understand", means have an idea about the sector and the company one is investing in - not necessarily an expert insight. Don't invest blindly on anybody's tips - no one gives a free lunch in this market.

As an investor one should be clear about the target, should know the risks for the scrip and the time-frame. And never have too many scrips in a portfolio - as a famous saying goes "stocks are like children, don't have more than you can handle."

Sharad Shukla, head - investment advisory services, IL&FS Invesmart:
The small investor should be clear about his investment objective. What is his financial objective? He must be clear on this before taking any investment decisions.

Also, just the way we visit the doctor for advise, it is important for an investor to take professional help for his investment needs.

The time horizon (for investments) will determine the strategy and investors must always look at spreading risks, making sure that a part of their investment is in a liquid asset.

Having a disciplined approach is also very important and investors must remember that there is no unique method/ formula to make money - many successful money managers have a variety of methods which suit their individual styles and backgrounds.

One must though focus on not making certain basic mistakes such as watching stock prices: stock prices will go up and down - unlike real life, the future is more forecasteable than the immediate, up to a point.

The investor must look at returns in a longer time span. Equity as an asset class has given better returns than all other asset class over a period of time.

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