Don’t follow, but take advantage of Mr Market's mistakes

The mid and small-cap stocks had a significant fall last week. Instead of speculating about what led to it and what triggered it, let us look at issues that will be more important from 1, 3, and 5 years from now.

The main question to ask is what is the current valuation level given the future growth prospects. Now, if you were a month back from a 3-5 year or longer-term perspective, without which you are not an investor at all, then what was it that you saw?

You probably saw a group of companies with strong fundamentals, meaning a strong balance sheet, persistent competitive advantages, large growth opportunities in the long term, and well-defined growth paths in the short term, and, most importantly, that they were available at a significant discount to their intrinsic values.

If that was the case at higher prices, it is more so at lower prices today. It is clear that if one is an investor at some price, then one should remain a buyer at lower prices if fundamentals are the same since valuations are lower and offer a higher expected return at a lower risk.

Now, to address the question of waiting for a further fall before buying lower. Many people think that if they wait for a still lower price, then it will be better since the risk-reward will be even better. No doubt, if the market falls further, then it is still cheaper and better. If there is a large macroeconomic event that has happened, like the global financial crisis or the Covid crisis which is going to impact the long-term fundamentals of the whole economy, meaning most listed companies, it makes sense to consider the scenario that the markets could fall further.
However, as was seen during the Covid crisis, even that cannot be predicted easily. The markets recovered quite quickly. But at least under a bleak macroeconomic scenario, it might make sense to consider the idea of a further fall.

However, if there is no macro-economic event that makes the future economic fundamentals themselves unpredictable, and this is extremely rare, and the fundamentals are positive, the risk-free interest rate path is on a reducing trend, economic growth is in a positive trend, companies have large order books, and are investing for growth with a large customer demand outlook, and the valuations are cheap compared to the conservatively estimated future cash flows, it is more important to invest your capital when you have a better opportunity.

Investing mantras for long-term wealth creation.

1. Focus on Quality:

Invest in high-quality companies with strong management, a proven track record of profitability, and a clear competitive advantage. These companies are better positioned to withstand market downturns, recover losses, and provide stable long-term returns.

2. Diversification:

Diversify your investment portfolio across different asset classes, sectors, and regions. This strategy can help reduce risk by spreading your investments and protecting your portfolio from downturns in any single market or sector.

3. Stay Informed:

Stay updated on market trends, economic indicators, company news, and regulatory changes. This information can help you make informed decisions and seize opportunities in the market.

4. Long-Term Perspective:

Maintain a long-term perspective when investing in the stock market. While short-term fluctuations are common, the market tends to trend upward over the long term.

5. Avoid Market Timing:

Steer clear of trying to time the market by buying and selling based on short-term price movements. Market timing is challenging to do consistently and can lead to missed opportunities

6. Risk Management:

Emphasize the importance of risk management in investing. Set realistic investment goals, diversify your portfolio, and use stop-loss orders to limit potential losses.

7. Seek Professional Advice:

Consider seeking advice from a financial advisor or investment manager. A professional can help assess your risk tolerance, develop an investment strategy, and monitor your portfolio to ensure it aligns with your goals.

8. Emotional Discipline:

Practice emotional discipline when investing. Fear and greed can cloud judgment and lead to poor decisions. Stay disciplined and adhere to your investment plan, especially during periods of market volatility.

Conclusion

When it comes to investing, it's crucial to maintain a composed and rational mindset, free from the influences of greed or fear. Making investment decisions based on these emotions can lead to impulsive actions that may not align with your long-term financial goals. Instead, it's advisable to approach investing with a clear understanding of your risk tolerance and investment objectives. By staying calm and rational, you can make more informed decisions that are in line with your overall financial strategy.

(Vikas Gupta is CEO and Chief Investment Strategist at Omniscience Capital)
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)