Two Most Important Fundamentals for Sector/Theme Investing

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“IT mein deadly scope hai”

“Gaon mein production badh raha hai toh rural economy mein bhi growth hoga”

“Internet ki demand badh rahi hai toh internet companies ke stocks mein bhi growth hogi”

Most of us have seen the wonderful ads by Smallcase advocating investing based on future growth prospects. The concept is simple – if you think a particular sector or theme is going to benefit in the future, you can take advantage of the growth by investing in the readymade stock baskets at Smallcase.

Although the ads have simplified the concept for brevity, there is more to know before one puts their hard-earned money in stocks.

The success of any investment decision regarding a sector/theme is based on the two most important fundamentals:

1. Future growth prospects of a company/sector/theme (which is obvious)

2. Valuation/Prices at which you invest (the difficult part)

Now, if you do some thorough research and gain some insight to feel confident about better future growth prospects of any particular sector/theme you can still lose a significant amount of money or get poor returns even if your understanding was right. Why? Because stock prices were too expensive to invest in that leaves no scope for future returns or worse they were discounting unrealistic future expectations.

Irrespective of how good a business or an industry is, everything has a fair price in this world. If you are paying much more than the fair price, your future returns are compromised.

There are multiple examples in the past where companies saw growth in revenues but their share prices remained stagnant even for more than 10 years because the starting point was at a very high price/valuation which left no scope for future returns. Let me share two examples:

1. HUL share price generated no returns over the 10 years period from the year 2000 to 2010 despite decent growth in revenues

2. Stock prices of top US companies and darling of stock markets in 1972 (many of which are still household names like Coca-Cola, Disney, IBM, J&J, etc.) generated no returns over the next 10 years

It’s not easy for common people to determine the fair value of any business/industry and therefore they are bound to be disappointed with investment outcomes when the market cycle reverses. One way to minimize disappointment is by investing in a staggered manner over a period of at least 5 years. Another way is taking the help of fee-only investment advisors to guide you with the right investments and asset allocation at fair prices which are suitable to your risk profile and investment objectives.

Some emotions are priceless but there is no place for emotions in successful investing.

Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.