The stock market is a great place to make money. According to Motilal Oswal’s Annual Wealth Creation Study, the top 100 wealth creators added Rs 28.4 lakh crore to shareholder’s wealth during 2011-16. What’s even more interesting is that this value creation happened when the markets were not exactly seeing fireworks. The Sensex grew at a tardy pace of 5% CAGR during 2011-16, but the Motilal Oswal study shows that the top 100 wealth creators grew shareholder wealth by a dizzying 18% CAGR. Ajanta Pharma, the fastest growing stock, multiplied investors’ wealth by 53 times in five years.
At the same time, some stocks also destroyed wealth. PSU giant BHEL alone has destroyed more than Rs 75,000 crore of wealth. Its market cap has fallen 70% from Rs 1,07,380 crore in February 2011 to Rs 31,598 crore now. Indian Overseas Bank is trading 84% below its 2011 price. Motilal Oswal estimates that almost Rs 15 lakh crore worth of wealth was destroyed during 2011-16, led largely by the downturn in metals, mining, PSU banks, capital goods, real estate and construction. So, while you can make heaps of money in the stock market, you can also lose your shirt.
What can ensure success in stocks? Our sixth anniversary issue looks at some basic attributes that can help make money in stocks. We reached out to experts and asked them to explain why a certain trait or skill is critical for success in stocks. The simplest way to make money is to buy a great company when the stock price is low. But this is easier said than done. When Infosys came out with its IPO in 1993, the issue was undersubscribed. Morgan Stanley bailed it out by picking up 13% of the equity at the offer price of Rs 95 per share. Very few small investors can be like Morgan Stanley and look into the future. But fundamental analysis, which assesses the prospects of a company, does exactly this.
To analyse a company’s prospects and assess its potential, one needs to be conversant with the financial terms used in research reports. According to tax and investment expert Balwant Jain, a successful investor should be able to read balance sheets and decipher the quarterly and annual numbers reported by the company.
But more than anything else, stock investors must demonstrate monumental patience if they want to make serious money from stocks. They should learn to withstand volatility and hold tight when the going gets rough. Legendary investor Warren Buffett says his favourite holding period is “forever”. But though small investors are enamoured of Buffett’s ability to create wealth, they are not willing to listen to his advice.The age data of stock ownership is not available, but mutual fund statistics give a fair idea of the average Indian’s investing horizon. According to AMFI data, small investors withdraw 27% of the investments in equity funds within a year. Almost 47% of the investments in equity funds are redeemed within two years. “Small investors just don’t have the patience or the long-term vision required to make money from equity investments,” says a senior fund manager.Experts say this is not a problem only in India. “Short-termism has become very pervasive in stock markets across the globe. In 1960, the average holding period of stocks by investors on the NYSE was 100 months. By 2015, this average holding period had fallen to eight months,” says Devendra Nevgi, CEO of Zyfin Funds.
Of course, the hold forever strategy comes with caveats. If there is a disruptive change in the external environment for a company, or an internal development alters its fundamentals, it is time to exit the stock. It is here that investors have to fight the behavioural biases that nudge them to act is a certain way. The confirmation bias is one such malady, where one seeks information that confirms one’s view. “Great investors do two things that most of us do not.They seek information or views that are different than their own and they update their beliefs when the evidence suggests they should. Neither task is easy,” says a report by Credit Suisse on the attributes of successful investors. “A seasoned investor has to be flexible because company managements, business strategies and the market conditions keep changing,” says Dinesh Thakker, Chairman and Managing Director, Angel Broking.
This is why successful investing is not just about buying at the right time or holding for a long term but also exiting when the tide turns against the company. “Erosion of cash flow visibility, sharp drop in demand for products and services or a tectonic change in the policy environment are some of the reasons to dump a stock,” says Kunj Bansal, Executive Director & CIO (Equities), of Centrum Wealth Management.
The 8 secrets
1. Fundamental analysis is critical for stock investing
2. Investors must learn to read companies' annual reports, understand financial terms
3. Think long term when investing in stocks
4. Keep updated with world news to take a holistic view when investing in stocks
5. Selling stocks at the right time is as important as buying good ones.
6. Use safeguards when trading in stocks, invest only what you can comfortably risk
7. Be tax-wise when investing in stocks to maximise gains.
8. Use the right parameters when researching stocks.