Last time we discussed with you some investment principles of a legendary investor Peter Lynch and touched upon six stock categories he mentioned in his book One Up on Wall Street. Those of you who read that piece would know only earnings and assets can drive the value of a company higher. After all, the basic motive to invest in any company is to multiply the value of our investments, isn’t it?
The topic for today is how you can simplify your life as an investor without gluing your eyes constantly to the market movements. An average long term investor need not follow complex investment strategies or track markets on a real time basis. And it’s perfectly fine if you don’t understand even an iota of derivatives.
Twenty years ago, the father of value investing—Warren Buffet—termed derivatives as “financial weapons of mass destruction” while addressing the shareholders of Berkshire Hathaway in an annual letter.
After all, the market belongs to all. Anyone can invest in it but not all may reap good returns. For that, you need to be a smart investor and invest intelligently.
Not reacting to every development is extremely crucial in today’s day and age of information overload.
Rising markets expose you to a lot of positive news and the negative news flow may intimidate you more when the equity indices are on a downward spiral. But intelligent investors don’t shift their focus every time there’s some new development. Rather they device a strategy that is less complex and requires no real-time monitoring.
Here’s an example! Rising inflation, rising interest rates, disturbed supply chains resulted in higher input costs for most businesses lately. But how intelligent is this generalization? If you refrained from investing in equities just because business news reporters are cautioning you against the adverse effects of inflation on corporate profitability, you would miss some excellent opportunities.
Consider two pairs discussed below.
Hindalco Vs Maruti Suzuki: Hindalco is India’s largest fully integrated aluminium producer and Maruti is India’s biggest passenger vehicle brand.
There are a whole host of factors that affect the performance of both these companies individually. But the broader trend is noteworthy—rising metal costs might boost the performance of a commodity producer but might hamper the performance of a commodity consumer.
True, Maruti can pass on these higher metal prices to their customers, perhaps with a lag. But will cost-cautious customers look for cheaper alternatives and could they consider used-cars which are relatively new and in good shape?
So will it also make sense to keep an eye on the prices of used cars and also on the interest rates of auto loans?
Take one more example and a slightly different one this time.
Britannia Vs Balrampur Chini: Britannia is a leading biscuits and bakery products manufacturer. The company has seen a consistent rise in the cost of its basket of agri-commodities—flour, sugar, milk and refined palm oil, for the past 3 quarters.
On the other hand, India reported an impressive 65% jump Year-on-Year (Y-o-Y) in sugar exports in FY22. And there’s an entirely new angle to the sugar sector in India— the ethanol blending programme of the government. By 2025, India wants to achieve an ethanol blending of 20% with petrol.
In recent times, sugar mills have reported noticeable improvements in financials—reduction of debt and expansion of revenues and profits.
So, if you were to draw a one line conclusion from the examples we discussed just now, can you say that commodity producers are benefiting more than commodity consumers at present? Maybe that’s a logical inference. The moot question is how long will it take to turn the tide? Hardly anybody knows with certainty.
That’s why geeks say diversify, diversify, diversify! If you buy a bit of both, your return may be mediocre but so will be your chances of going horribly wrong. You may take more exposure to one theme and go light on the other. But that’s a tactical call.
However, if you start betting only on cyclicals because you think they are having a good run, and completely avoid commodity consumers, you might regret your decision, should the tide turn without any prior notice.
After all, who might have thought at the beginning of the pandemic that metals would have such a stellar run? Years of underinvestment/ down-cycle and Covid-related production losses did the trick.
Extending the Peter Lynch’s approach, a wholesaler of confectionaries may perhaps see a budding trend in sugar prices before a stock research analyst can spot it. And so is the case with a garage owner dealing in pre-owned cars when it comes to outlook for the auto sector.
In essence, intelligent investors use their domain knowledge to spot good investment opportunities in their respective areas of core competence. They diversify and track earnings.
Which industry are you associated with and are there any big trends in the making? We are curious to hear from you!
You may also like to read: India to play on the front foot for its defence! Time to cherry-pick defence stocks?
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