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Motilal Oswal

By Motilal Oswal 26-Aug-2013 | 18:13

There is ample empirical evidence indicating that equities outperform other asset classes over the long term. The BSE-Sensex has appreciated at an impressive compounded annual growth rate of 13.4% over the period, April 1991 to March 2013. Add to this the tax advantages, transactional ease, liquidity and the relatively low investment threshold compared to real estate or bullion, you would realise few asset classes come even close. Even for the uninitiated, a simple strategy of systematically investing a fixed sum every month in an index fund can produce excellent results. Had a lay investor invested `10,000 at the start of every financial year over the 22-year period 1991 to 2012, on April 1, 2013, the value of his portfolio would have been `9,67,730, translating into tax-free return of over 12% per year.

While equities are volatile and an equity investor is exposed to the risk of loss of invested capital, the superior returns a carefully executed equity investment strategy can generate outweigh the risks involved. No investor can afford to ignore equities. Yet, lay investors today appear to be disenchanted with equities. The reasons are not difficult to gauge. Often, lay investors are drawn to equities during bull market frenzies. They simply follow the herd and bet on whatever stocks are popular, without even bothering to understand the businesses the stocks represent. They begin to wrongly equate gambling with investing. When one gamble fails to pay off, they jump to the next, hoping that will. Such a strategy is bound to backfire. When the frenzy dies down, such investors are left impoverished and disillusioned.

Key lessons from the above: Do not simply follow the herd. Or, as legendary investor Warren Buffett puts it, “Be fearful when others are greedy, and be greedy when others are fearful!” Also, do not let emotions cloud your judgement. When you buy shares, you are buying part-ownership in a business. Undertake due research on the business before you decide to invest. For an investor, volatility is a friend. Risk comes from not knowing what you’re doing. Remember the words of Benjamin Graham, “The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”

There is a thin line separating investment and speculation. While it is never bright and clear, the sharp decline in the share of actual delivery-based trades in the market turnover indicates that it has blurred further over the period, April 2007 to March 2013. The average daily market turnover increased from `73,556 crore in FY08 to `1,67,924crore in FY13. This was driven by the F&O segment, where volumes nearly trebled from `53,119 crore to `154,896 crore. Overall cash volumes, which accounted for 28% of the average daily market turnover in FY08, declined to 8% in FY13. Delivery-based trades constituted just 2.3% of the average daily market turnover in FY13, down from 8% in FY08. Delivery-based trades by retail investors could have declined to as low as 0.25% of the average daily market turnover.

Money is seldom made by frequent trading or speculation. Graham points out, “As in roulette, same is true of the stock trader, who will find that the expense of trading weights the dice heavily against him.” The secret to achieving success in equity investing is really, “Buy right, sit tight”. Once you identify a superior business and buy into it at a good price, even a fair sale in the distant future will result in good returns. Do not let the day-to-day stock price fluctuations perturb you, but use extraordinary dips as opportunities to buy into good businesses at discounted prices. When you invest, your fortunes are tied to the fortunes of the business. As the business prospers, so will you.

In 2007, we had launched our landmark India NTD (Next Trillion Dollar) report. This report brought out a simple, yet profound, fact – it took India 60 years since independence to generate the first trillion dollars of GDP, while the next trillion dollars (NTD) would take only 5-6 years. We juxtaposed the NTD idea with China’s GDP growth experience and had surmised that by 2020, India’s GDP would be five trillion dollars. While the subsequent slowdown in GDP growth might mean a delay in the achievement of this milestone, the trend remains intact. This NTD era spells “unlimited growth” for several businesses.

Despite the uncertainties abound, retail investors should not shy away from equities. A relatively low-risk/low-involvement strategy for lay investors is systematic investment in a good index fund. For the more knowledge/research-oriented, now is the opportune time to actively seek out great companies – companies with “Deep, Dangerous Moats”, run by “Honest and Decent Leaders” (to use Warren Buffett’s words). This way, you could ensure that you continue to enjoy your share of the “Gold” which the leaders of such companies make within the safety of their Moats.