Our Financial paradigm is our belief system on money. The foundation of a wealth creation machine is a mindset oriented towards identifying and exiting opportunities timely as an investor.
A couple of lessons have kept professional investors identify better investible ideas and add more during range bound markets.
Do the asset allocation before entering the market
Asset allocation helps investors become above average as it helps to stay the course. Ace investor Vijay Kedia has practiced this since he started investing. This has helped him maintain his peace of mind. Therefore even in extreme market movements he is able to maintain his positions.
Have an Exit Strategy
Every strategy works on certain basic factors which act as enablers and certain factors which act as blockers. Before finalizing the investing process one needs to understand the exit strategy. This practice helps to take a dispassionate view and reap the fruits of one’s decision.
For eg:if an investor had a defined exit strategy when he had invested in midcaps 3-4 years back he would be in a happier frame of mind. This applies to investments in all categories.
Many a times it implies exiting six months before the peak and entering a year before the momentum starts picking up.
Look at the future
Before adding to portfolio position one needs to look at the future. An interesting interaction with a Srexecutive in the industry over a discussion on a flight many years back “Think like a child. It helps to identify key trends in the future “helped to crystallize our investment policy.
For eg:In the beverages industry ,preservative based soft drinks are not so much in favor as they were 5 years back on account of greater awareness of being health conscious with most of the consumers. Therefore portfolios with beverage players have been an avoid in our portfolios.
This is the core ideas behind a good portfolio. How future worthy is the portfolio is what matters. To share an example people may not buy cars in the future; however they may lease it out directly from manufacturers. In our view even in the event of an upside, the auto sector remains a trade.
Build your knowledge bank
Many investors in today’s world have a lot of information; however it does not get translated to perspective which comes only from seeing markets over a longer period of time. In the longer term the right mix of perspective and tactics matter.
Having an investing group which has seen multiple market cycles reduces the risk of taking uninformed decisions and ensures risk management is proper. With that one has a better chance of making the portfolio a compounding machine .The key to positioning the portfolio is to understand the place in the cycle.
For e.g.: Life insurance players are a long term opportunity in the listed space as a category as insurance penetration is lower. It is at the early stage in the cycle from a 5-10 year point of view.
Monitor the portfolio religiously
The portfolio is a mix of businesses. Like a board observing a business, one needs to view whether the portfolio is positioned for growth adequately.
A good gardener weeds out plants from the garden which are not growing or adding to the beauty of the garden as a whole.
Similarly a professional investor monitors the portfolio regularly to weed out non-performers and adds to the performers.
As a thumb rule if there are 10 funds/securities in the portfolio
2 will outperform –Certain top quartile funds like Axis Bluechip have helped in maintaining growth momentum for our clients.
6 will be average – These are funds or ideas which have matched their category averages.
2 will be nonperformers and may result in loss of capital- I recently recollect a time when the graphite electrodes investment position values in the personal portfolio had changed on account of increase in supply side in China. However on account of timely observation capital depletion was not observed.
The role of a professional investor is to eliminate the non performing part of the portfolio to conserve invested capital. This improves the likelihood of winning as well as releases capital for better investment opportunities.
Understand sectoral impact from a demand perspective
Cyclicality in markets/industries on account of policy changes is a common phenomenon. A good thing to understand is demand for the category despite policy changes. Certain factors help to identify better opportunities like
Continuity of client demand
Focused management approach towards productivity improvements and increasing the competitive advantage
Inorganic growth-if inorganic growth is a core strategy then it is a good possibility that superior returns may not be experienced, especially if the broader industry is going through a downturn.
The key to portfolio success is to improve the odds. There are no guarantees; however frameworks help us to deal with situations in a structured and focused manner.