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Why the bamboo farmer makes more money in stocks than you

imageI have a belief: don't choose a mutual fund on the basis of past return; choose it on the basis of proven management, effective business and a good outlook. The market has reached maturity level for most part, where governance gets a premium. Small pockets of the market, especially penny and low floating stocks, is driven by momentum.


It is important that investors begin to measure the long-term potential cost of their short-term investments. It is the long-term view on earnings, value and scalability that creates wealth in equities. The temperament of equities investor should be that of a bamboo farmer (and manifold over).


A bamboo may remain a seedling for years and then in a few weeks it would grow so rapidly that the plant will outgrow the farmer. Likewise, a good stock may remain dormant for years, and then it would speed up with a velocity that will confound many.


For example, had you invested in the IPO of Kotak Mahindra Finance (later Kotak Bank), you would have made tonnes of money on listing. But if you had purchased it post listing, you needed to wait for years (till 2004) to see return on your holding on a sustainable basis.


In the current market setup where buoyant sentiment has pushed up prices into the fair value-plus zone, the stocks rally is being driven by hope rather than greed for most part of the market. At the current level, some pockets of value remain, especially in the IT and pharma sectors. But these are contrarian plays. The breakout in these sectors will be dependent on defining events and regulatory changes, which do not seem to be visible currently.


Some mutual funds are currently betting big on the shift in savings from physical assets to financial assets. At that, the confluence of major regulatory changes like GST, declining inflation and reducing interest rates are creating the ground for sustainable long-term growth. We continue to believe that long-term SIPs and opportunistic allocation would create wealth for investors.


Protecting capital from mistakes is as important as making it grow. It is, therefore, important that risk-appropriate asset allocation is followed and self-discipline is maintained in this market. Because wealth creation is not a function of luck, but of enterprise, value and expertise. For that reason, I would recommend that investors in coordination with their advisers, chalk out a long-term investment strategy, and invest in equities through a mix of SIPs and opportunistic investment at marke ..


Shah has over 25 years of experience in capital markets. He has managed funds across equity, fixed income securities and real estate. He has studied at the Institute of Chartered Accountants of India. Shah has also co-authored a book - 'A Direct Take'. His dream is to go backpacking with his better half some day. Nilesh Shah, MD, Kotak AMC

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