Investment lessons from the Covid-19 rout

Buy only when a company fits into your investment strategy. Don’t make your portfolio a collection of stocks – rather it should be a collection of businesses fulfilling your strategy, says Amit Gupta

Amit Gupta Jun 25, 2020
Amit Gupta

Amit Gupta

The new web series on Hotstar, Aarya, starring Sushmita Sen starts with a visual of working out on gymnastic rings with her life being about to be turned upside down. It is precursor of the mayhem which is to be followed in her life.

The investors on D-street may also be feeling the same after what has transpired in the recent times after Coronavirus hit many countries across the globe. The first quarter of the current financial year is coming to an end. It began with the Covid-19 lockdown at our homes with offices, factories and shops being shut. It is ending now with a mad rush to reopen the businesses and completing various compliances usually reserved for March-end every year.

The financial markets during this period have moved from fear to greed in just a matter of 10-odd weeks. For an overwhelming majority of market participants, it has been a confusing ride so far. Equity, debt and even arbitrage portfolios have suffered in the first half of the quarter while the second half so far has been filled with euphoria with the rise in mid & small cap indices. The 20-lakh crore ‘AtmaNirbhar package’ and the recent Galwan attacks on line of control has added volatility.

However, for investors it becomes imperative to learn from the previous cycles to avoid committing similar mistakes in a post Covid-world. Following points may be noted to create an investment framework for the next cycle.

Define investment objectives

Investors need to clearly define their objectives and goals from investments. Various factors like growth, risk, income, expenditure, yield have changed drastically in the post-Covid world and investors need to re-evaluate their objectives and requirements with the current scenario.

The oldest basic principle of economics – money does not grow on trees still holds true. In the long run all good companies give similar profitability and returns to investors. Trying to catch the “next big fish” never works. Buy only when a company fits into your investment strategy. Don’t make your portfolio a collection of stocks – rather it should be a collection of businesses fulfilling your strategy. If done correctly, it becomes slightly easier to navigate the treacherous reigns of black swan events such as Covid-19. One can comfortably take call of reducing allocation in certain sectors or even completely exiting a few of them.

Form a trustworthy investment team

Fruitful investment results cannot be achieved without a trustworthy investment team. A careful assessment of honesty and competence of those giving investment advice and services should be evaluated. This includes all stakeholders – investment advisor, portfolio manager, mutual fund manager or distributor, and even stock broker.

Once the team is formed, it is critical to remain informed about how the investments are performing. A periodic review (6 months to 12 months) is sufficient to know that your goals are on track. Be alert for any legal, policy or regulatory changes that can have a material impact on the investments. Discuss with your advisor any queries. You have hired them for this very reason – hand holding during tough times.

Ask three pertinent questions – why, when, how much?

Why are you investing in a particular business? Would you like to do the same business if you had sufficient financial resources? If not, it may not be worth it. My investment guru used an hypothetical test for evaluating management of a business: will you marry your daughter into this family? Will you leave this company equity shares for your children? If the answer is yes on both counts, then it may be worthwhile investing in that company.

When you want to buy a business becomes equally critical. Dealing with cyclical business requires deep understanding of the business and the turn-around point. Impulsive investment decisions are regretted more often by investors. Avoid investing where one does not fully understand the business, however attractive it may seem in the first go.

How much you want to invest in the equity markets will differ from individual capacity to earn, save and spend. However, never borrow money for trading or investing in equity markets. Leverage (specially for F&O) should be strictly avoided. Invest only that portion of the savings which is free of any immediate obligations.

Have realistic expectations

In a bull phase, the expectations from the investment skyrocket. They also come crashing down during bear phase. Keeping expectations realistic is critical to the peace of mind. A return of 10%+nominal GDP can be considered a realistic benchmark as it takes into account the prevailing economic conditions of the country. Any investment which does not even cover the opportunity cost – benchmarked to Fixed Deposit (FD) rates can’t qualify as well-managed investment over a 3-5 year time horizon.

Retail investors are under no obligation to report NAV to anyone. No point calculating it frequently. No point trying to find the best mutual fund or investment advisor with the best return. Investment expectations will never be fulfilled that way. Find people who are realistic in their talk and can guide accordingly.

Be balanced in your approach

Assess the success of investment strategy from the total returns you made on your entire portfolio. There will certainly be few outliers with multi-bagger returns. Do not celebrate or regret these outliers too much. You cannot and need not invest in all good companies. There will always be certain companies which even after during all due diligence and effort do not work out. One need to chuck them out after a while for the sake of overall portfolio returns.

Select those businesses, which suit best to meet your investment objective, are fundamentally strong and suit your investment plan. Never buy something just because something has fallen 80-90% from its original price. Never buy on SMS or twitter tips. Do your own diligence.

Amit Gupta

Amit Kumar Gupta has over a decade experience in investment analysis and portfolio management. He was responsible for setting up the research desk at his current organization - Adroit Financial Services Pvt. Ltd. across all multiple asset classes. In his current role, he acts as a fund manager for PMS vertical. In his previous stints, he has worked as a business consultant with leading MNCs and start-ups over diverse fields of Healthcare, Education and Retail. He is an engineering graduate of Delhi University and earned his MBA in Finance & Strategy from Queensland University of Technology, Brisbane.

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