In an interview with ETMarkets, Manish Goel, Founder and Director of Research & Ranking says, "Don’t compromise on the quality of the business or the margin of safety. If one compromises on these, then investment become difficult. It is crucial that one picks a business with 15-20% top-line growth and at least 15% ROCE with all other key qualitative and quantitative parameters in place."
How can one become a successful equity investor? Any strategies or focus areas you would like to recommend?
There are multiple ingredients that can help one become a successful investor. One of the first things that an investor must have is a long-term approach. In the short run, markets are driven by sentiments and liquidity but fundamentals drive the markets in the long run. If investors approach the markets with a 1, 2, or 3-year horizon then creating wealth could become difficult. If we look at the data between July 2020 and June 2021, it will show that the Nifty went up by 45%; whereas the Nifty has remained flat in the last 12 months from July 2021 to June 2022. The last 6 months have seen the Nifty go down by more than 10%. Between July 2021 and June 2022, almost 65% of the stocks from the Nifty 500 were down by 20% to 50%. Despite being excellent businesses, the share prices of these companies dropped substantially due to volatility.
If someone wants to enter the markets, they should consider at least a 5-year horizon. Then if we consider the long-term averages of GDP growth and Nifty growth in our country. The GDP average for 21 years was over 12%, and Nifty growth for the same period was around 14%. Investors can expect a similar range of compounding or a little more than that in the range of 20% but they must be patient. An investor must enter the markets with a long-term mindset and ignore the noise.
Read, understand, educate yourself and learn; it will help in becoming a long-term investor. Of course, there will be a period when the Nifty grows 45%, remains flat, or grows negatively in a particular year. But if one invests with a long-term horizon of 5, 7 or 10 years, then one’s investment amount can grow at a CAGR of ~20%. Thus, from a retail investor’s perspective, equity turns out to be an outstanding asset class that offers remarkable returns as compared to other assets.
How should one pick stocks amid volatile markets? Are there any rules or strategies an investor must follow?
There are certain rules that one must follow; not only during market volatility but in general. One of the first rules is don’t compromise on the quality of the business or the margin of safety. If one compromises on these then investment become difficult. It is crucial that one picks a business with 15-20% top-line growth and at least 15% ROCE with all other key qualitative and quantitative parameters in place. We have created in-depth videos to understand this better on our newly launched investor education platform – Informed InvestoRR.
Understanding these different qualitative and quantitative parameters is not difficult. With three or four qualitative parameters, up to three quantitative parameters, and the right diversification and risk allocation strategy, one can pick good quality businesses at reasonable rates right now.
For instance, one may wish to check out companies whose top-line growth, bottom-line expansion, ROCE, ROE, and promoter quality are in place. Additionally, one may want to thoroughly study the business, scout for sectoral growth opportunities, and invest with a 5-7 year horizon. This can enable an investor to enjoy compounding returns of close to 20% or higher.
So, if someone invests in companies by using pertinent qualitative and quantitative parameters, practices suitable diversification, implements an effective risk allocation strategy and explores growing sectors, then that investor is likely to be successful
The Rupee is depreciating, it is getting thrashed on a daily basis, we are fighting inflation, and there are recession fears. So what are your expectations from markets for the second half of 2022?
It is all about the numbers. Look at the last three months’ gross inflation data. In April inflation was 7.8%, but according to data released recently it came down to 7.01%. One can monitor five to six key factors - with the subsiding of inflation being one of them. We expect a healthy uptick in the manufacturing activity. IIP (Index for Industrial Production) surged to 19.6 percent in May – which accentuates the tremendous improvement in manufacturing output.
We expect the markets to adjust to a higher interest rate scenario. In India, we’ve already had two rate hikes and in the US the Fed has announced three rate hikes. So, markets have now learned to adjust to high-interest rates.
With this, if FIIs selling reduces which has seen some improvement from ? 40000-50000 crore every month for the last few months, in July it is at ? 6000 crores so far. These factors will play a role for the next 6 odd months. If all of these factors are manageable, and the Nifty growth as everyone expects for FY23 will be in the 18% range. For FY23 Nifty EPS should be the range of 830 to 850 range. If we give it 20 times or even 22times multiple, an investor can expect anything between 10% to 15 ..
With interest rates on the rise and global tensions – how should investors structure their asset allocation? Where do you see value in this kind of situation? Any sectors looking attractive after the recent fall?
At Research & Ranking, we are long-term investors. If we look at the long-term trends, Financial Services has been the best performing sector followed by IT, FMCG, and Auto. If we look at the data for the top 6 sectors - Financial Services, IT, FMCG, Pharma & Healthcare, Auto & Auto Ancillary, Paints & Chemicals contribute 50% of the market capitalization. But then there comes a year like 2021 when sectors like Energy, Realty, and Capital goods outperformed all other indices.
We believe in the structural growth story; we want to continue investing in sectors that help in supporting India’s structural growth story. We are not against investment in realty, infra, or energy. We do recommend these sectors when it’s their turn in the cycle. Since the contribution of the top six sectors is as high as 50%, we believe that one may wish to allocate 50% or higher to these six sectors.
Although Nifty fell by 10% over the last three months, data shows that FMCG, Auto and Banks outperformed all indices including Nifty. All the other sectors can be scrutinized and if opportunities arise then one can consider allocating some amount of capital to sectors such as Realty and Energy that have been performing well after several years. However, one should remember that these sectors are cyclical in nature. Hence investors may not want to have high allocations towards these.
Any Advice for all the new investors? Any hacks to manage the money or mistakes to avoid?
At Research and Ranking, we have developed four focus areas over the years. We have been in the advisory space for more than a decade and have enabled thousands of families to create wealth. These focus areas will help new investors as well as seasoned investors.
First and foremost is – ‘Stay away from six financial diseases’ – Leverage, Over or Under Diversification, No time to read, News all the time, Price is not everything, and Excessive Churning.
The second one is – ‘All years are not alike’ – we discussed that the NIFTY CAGR for the previous 21 years came to 13.95%. Again, if we see the last 12 months there was no return delivered. The year before that the returns were as high as 45%. So, all years are not going to be alike. If there is a negative growth year or a flat growth year and if an investor believes in India’s growth story, then it is advisable to allocate more as long as you have liquidity available. But if liquidity is not av ..
The third one is – Markets are driven by sentiments and liquidity in the short run but fundamentals in the long run. We have been educating our clients about this over the years through timely interventions. If there is a period when the market has moved up by 50% or more don’t read too much into it. 50% or 100% growth year on year is just not possible. Likewise do not worry about a 10-15% fall; look at the 5-year horizon - the market will settle down as fundamentals will deliver in the long run ..
The last one is – ‘Cherishing a few’; which means staying away from over-diversification. Invest in 6 to 8 good quality businesses for a much longer period like a decade or more. Study these businesses in detail and if they have delivered close to 20% CAGR over the years, it will help in wealth creation for retirement or any other life goal. Investment doesn’t need to be stressful; with these four key focus areas, one can become a successful equity investor.
What is the investment strategy and what has been the performance of Research and Ranking?
In terms of our strategy, we have a fundamentally driven long-term focus. Our aim is to generate alpha taking Nifty as a benchmark. We have a 10-core-rule strategy on both qualitative and quantitative parameters to shortlist stocks. The quantitative parameters include return on equity (ROE), return on capital employed (ROCE), the number of years positive free cash flow (FCF) is delivered, sales and PAT, CAGR growth, Beta level, and more.
The qualitative parameters include the promoter’s holding, the management pedigree, future prospects of the company and the product, competitors, the market and industry standing.
Our portfolios are bucketed in three categories -Structural growth with a 3-5 years view, Momentum stocks with a 1-3 years view and Special Opportunity with a one-year view.
The R&R model portfolio is focused on long-term wealth creation. With our Research team, we undertake thorough due diligence to create a mini-universe of attractive opportunities followed by the creation of a personalized portfolio tailored to the customer’s risk appetite and financial goals. As of 31st March 2022, our model portfolio has delivered 748% absolute returns since 1st April 2014. We continue to add more solutions and expand our offerings to different investor categories – especially on the basis of their investible surplus. We are also committed to empowering investors through education. This is done through Informed InvestoRR – which is a platform that would enable investors to discern actionable facts and data from the noise.