Essential virtues for stock market

There is ample evidence to suggest that new investors quickly discover that investing is easy, but it is really difficult to invest well. Irrespective of how much or how little experience one has accumulated, one can never claim to have mastered the art of investing and its fundamentals. We live in an era of compressed business cycles and huge technological disruptions. That makes us challenge the old order of doing things regularly, putting us on a continuous learning curve.

That makes investing both fascinating and frustrating. The moment you think that you have understood the rules of the game, they change. The challenge is to adapt to the changing conditions—if you don’t, you are bound to be left behind.

There have been many great investors and fund managers who did exceedingly well for a period of time, but the moment they started basking in their past glory, they faltered on performance and failed to live up to their reputation. Humility and the ability to accept change are the two most important virtues needed for successful investing.

At this point, however, it seems as if all the rules of investing are undergoing a change. Gone are the days when a well-diversified portfolio with different asset classes was enough to make you feel secure.

The interconnected nature of the global financial markets makes them move almost in tandem. Fears of the Greek debt default and the more recent Italian debt woes have been dragging stockmarkets down globally. A couple of years ago, there was a boom in the stocks of natural resource and commodity companies on the expectation of rising activity in the emerging markets. Globalisation is good, but there is a flip side to it: investors have nowhere to hide. When stocks drop, they drop at the same time.

However, it is in times like these that opportunities are created. The trick is to understand that investing is akin to buying a business run by a credible management. Businesses go through different business cycles and see good and bad times. However, during a turmoil, stockmarkets offer opportunities to buy good businesses at attractive valuations. The current times offer such businesses at attractive valuations. Why? The stockmarkets are in a state of fear, with investors shunning stocks and fleeing to the safety of fixed income instruments.

If you look at the overall results of corporate India over the last few quarters, they have been poor. However, there still are businesses that have shown resilient performance. They were not the favourites of the market, but they followed conservative and sound business practices.

The fads and fancies of yesteryears are biting the dust. The glamour is fading and so are the profits. Look at the profits of infrastructure companies, airlines, telecom giants and power companies. What has happened to those rosy forecasts made just a couple of years ago? These were wrong businesses from a value investing point. Infrastructure is needed by our country, but does that mean that infrastructure business will reward shareholders? Highly capital-intensive businesses with long gestation periods reward creditors more than shareholders.

All of this might make one think that investing is a lost cause. But it is not. The key is to avoid the fancies of the market, stay humble and understand that short-term investment success is no guarantee that you have discovered a lasting secret that will give you stellar returns throughout your lifetime.

The best thing you can do in such times of uncertainty is to be aware of the changing trends and spot new opportunities that fearful investors miss. Worried about inflation? What better hedge against it than stocks?