Stay invested in equity for long term

History has shown that equities have been the best investment class over any long-term period. (Sensex has provided return @ of 21.12 per cent on compounded basis in last 10 years). However,most of the people you would ask have lost money in the stock market while investing in equity especially the retail investors. Why is it so? Firstly,we need to understand market in the short run is a function of human sentiments rather than the fundamental value of the underlying companies. It is there where most of people lose out as they get carried away by other peoples mistake. In the long term,the equity markets tend to mirror the economic growth of the economy but people tend to time the market,that is where they lose out.

In order to be successful in investing,it is very important to have two things. First is to have a well defined investment strategy and secondly,to have the discipline to follow that strategy.

In selecting the right stock,the most important attribute one should look at is sustainability of its business model. Next is going through the basic financials like strong cash flow,low debt to equity ratio, long record of continuous dividend payments and the quality of its management.

Investors who are not able to devote time and effort for selecting the stocks should opt for monthly or quarterly systematic investment plan in index funds,diversified or balanced funds which are able to mirror the returns generates by indices such as Nifty or Sensex. Research has shown that investors who have invested systematically over a period of time have outperformed the market returns as compared to lump sum investment. The benefits of SIP are manifold such as,it helps averaging cost of investment and eliminates the need and effort for timing markets.

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Indian market has numerous examples where investors have accumulated huge wealth by showing disciplined investment strategy and holding on to their ideas in spite of market conditions. For example,a professor who started from few thousands rupees in 1990s has now accumulated wealth with over few hundred crores by identifying potential multi baggers and still teaches in that same MBA institute in Mumbai.

A lay man who wishes to build wealth through equity can look at value investing technique which has been founded by Benjamin Graham and well articulated in his book Security Analysis released in 1934 and the revised edition of The Intelligent Investor. His technique has been grabbed and vigorously practised by various professional investors globally including Warren Buffet (2nd richest person in the world) and Sir John Templeton. His concept of snapping up stocks available at bargain prices on the basis of few parameters has delivered extraordinary returns with rarely losing money. For example the saga of Satyam crisis which drove the price of the stock to as low as 6 rupees could have been bought as a bargain buy amidst extreme pessimism.

Given the strong growth trajectory India is treading on,equity markets are expected to continue to outperform other asset classes despite short term gyrations.

Author is PMS Head,Globe Capital

First published on: 25-04-2011 at 00:00 IST