How to invest in Equities

Determining your equity strategy can be the most daunting part of investing. Given the low rates globally, let us work out the best way for you to control your risk and to get the growth you are looking for.

How to invest in Equities by Sandip Aggarwal

Building a single line equity portfolio requires substantial expertise to run and manage it. If you don't have the skills to assess companies and trade the markets, you might still be fine if you follow a few guiding principles:

• Treat each stock you buy as a share of a business you would like to own at a target price.

• Be patient and wait for the business to be available at the value you want to purchase it.

• The cheaper you buy the business, the greater margin of safety you have on the downside.

• The more familiar you are with the company and its valuation, the better your ability to add to your position in case the stock falls, allowing you to hold for the long term.

• Make sure your position in any stock is sized carefully and you are not over-exposed. Leave some space in case you need to add to the stock.

• Try to ensure you get a diversification of stocks and industries in your portfolio

• Find great earnings compounder businesses rather than commoditized businesses.

• Make sure the companies you select are of quality, are market leaders, have a competitive advantage and have a moat protecting them from new entrants.

• Businesses can face challenges and you will need to review your portfolio to assess which stocks to switch as their earnings growth potential falters.

• When stocks look overvalued and the market Greed and technical factors are flashing red, it makes sense to take profits for a portion of the portfolio.

• Stocks are very volatile. and you need to be prepared to face the peaks and troughs. Valuation, long term earnings and growth potential are your anchor.

The last five years have been stellar for equities as they climbed a wall of worry to deliver spectacular results. The long-term investors had to take sharp drawdowns along the way and huge sector rotations.

Choosing a set of blue-chip stocks that have very strong business leadership models can be a great addition to your portfolio if you stick with them long term. Mastercard and Microsoft are two such names.

One of the big risks in managing equities is handling downturns. This can be alleviated by doing your homework on the stocks you own, ensuring you have space to invest and enough cash kept aside for the occasion. How much conviction, firepower and will power you have to invest will give you your answer on the success of your strategy.

Going for flashy thematic stocks is not an easy investment strategy as their volatility shoots up easily if they reverse direction. Fashions come and go with momentum. Thematic stocks are hard to value and therefore harder to invest in when they fall.

Cyclical and commodity stocks can be difficult to manage as they require to be traded more actively and have less consistent earnings support.

Segregate your core equity portfolio from tactical portfolios.

Leverage and options are two things to stay away from, as they will accelerate your gains as well as your losses. Drawdown risks can become unmanageable if there is leverage involved. Option values face time decay which adds a further layer of risk.

Pick your advisor carefully as not many will be prepared to manage equities over volatile periods. He will need to have a long term approach, understand the company valuations and cut through the market noise. He should be prudent, keep some cash reserves and size the positions carefully ensuring diversification.

Sandip Aggarwal.

Founder & CEO