To Consistently Outperform Equity Market. Do this! -

Table of Contents

Investing is all about the Approach

Investing at its core is all about the way we approach it. For instance, just check your portfolio from the previous year till now. Just look at all the changes you’ve made just in the past 12 months. There’s nothing right or wrong with it. But, that’s how you approach your investment, right?

So, you have your own approach and I have mine. We all do.

But what works is what matters the most.

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There are several options available to you in the world of investment. There are a wide variety of financial products available for investment, including savings accounts, bonds, stocks, and mutual funds.

In addition, you can invest in a mix of these instruments if you’d like. How do we weigh our options in a world where they seem to be endless? That is if you know how to find good investments and stay away from bad ones.

How to Consistently Outperform Equity Investing?

Valuation

Valuation is important because we must know what we are paying. And trust me, no one can value a company with full certainty. We all make mistakes. And that’s fine as long as you learn along the way.

It is up to us how we value a company. But, never invest in a company without doing your own research. When I say research, it doesn’t mean you crunch hundreds of formulas and mathematical figures and such. Just read the balance sheet of the company to understand its current position. See the debt, the cash position, the assets, liabilities, where it is invested in, whom it has given cash to, who is their creditor, etc.

Basically, read the balance sheet as if you are the company’s owner and you have just received information about your ownership. So, you’ll be curious to know what has happened to your company up until now.

Diversified Allocation

Will you invest all your savings in that one company if a legendary investor tells you to invest in it? Maybe he is right in suggesting the investment. But, what if the company goes down? Let’s imagine that the investment went down 30%, and since your entire portfolio is of this one company, your portfolio return is now at -30%.

I mean, just investing in one company makes your investment that much more vulnerable to a market correction. Now let’s check with a slight diversification, where you’ve got just a few investments with a huge allocation. For example, let’s say five companies with a 20% allocation each & If there’s a 10% drop in one company, your total portfolio has dropped just 2%, given that the other investments stay constant.

ET Money Genius!

According to research, you can reduce over 90% of market fluctuation risk by owning a 15–20 stock portfolio. Just imagine a 20-stock portfolio with equal distribution. The maximum you can invest in one company is 5%. So, the negative impact one company can have on your portfolio is up to 5% and no more. Most mutual funds are instructed not to allocate more to any one company. This is probably why they don’t get burned as often as retail investors do.

Size of Investment

We just saw the importance of diversified allocation. But, not being over-diversified is equally important. I’ll give an example.

We are all familiar with Shri. Rakesh Jhunjhunwala. Yup, the big bull of the Indian Stock Market. His net worth is estimated to be in excess of 35,000 crores. But, almost 40% of his net worth is in one company, and that’s “Titan”. Coincidently, Titan was his biggest, life-changing investment.

Let’s take Mr. Buffett’s portfolio. Mr. Buffett is the world’s largest investor and over 40% of his portfolio is in one stock. That’s Apple.

So what we can learn from such legendary investors is that they keep the winning stock and, in fact, add more of it as it grows.

Back to Shri Jhunjhunwala. Did you know that he invested in Titan stock back in 2003 at just 40 per share for Rs. 10 lakh! He then added more as he was sure of his investments. Today, those holdings are worth over 2 billion dollars.

Understand the Market

Now, this is very important. Understand the market you are planning to invest in. Instead of going behind the financials of the company, take a step back and see how big the market is.

For example, we know ITC Limited. It’s the largest cigarette manufacturer in India with over 75% market share. And cigarette sales are a cash cow for the company that’s growing at double digits each year. The only other close competitor is VST Industries.

There’s no other way for ITC to lose its market share than by reducing it by itself. What’s also noteworthy is that the ITC is spending much of its capex on enriching its FMCG business. Something away from cigarettes.

This is just one company. There are over 7,500 companies in India, each with its own market and business environment.

Market Capitalization

The undeniable fact is that small, efficient companies can create much more wealth than midsized and large-cap companies. Because, once upon a time, all the mid and even large-cap companies were small-cap, right?

So, try to buy and hold onto small-cap companies. In my next video, I’ll share tips on how to select a small-cap company. You can check this article for more information.

My recommendation is that you allocate at least 10% to 20% of your portfolio to small-cap companies with market capitalizations of less than 5,000 crores. This way, by allocating just 1% to each company, you can create a separate small-cap portfolio of 10 to 20 companies. Even if only one of these investments performs as expected, trust me when I say that this one company will return more than your entire investment and more!

That’s the power of equity investing, the conviction for the long term.

Conclusion:

The ultimate goal of any investor is to have their portfolio outperform the market. Consistently outperforming the market is seen as an exceptional feat. You should now have the knowledge to succeed in the market.

You have observed the many methods investors & traders employ to try to outperform the market. You can now pick the approach that most resonates with you. Hope this article assists you in the process. You should start using that strategy right away to build your own portfolio of investments and beat the market.

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