Benefits of long-term equity investing

Cricket and stock markets are two topics of conversations that are felt and spoken about very passionately by most Indian households. And to be honest, there is a striking similarity between these two.

Test cricket, which is the purest form of the game, is a test of one’s patience, perseverance and skill. Similarly, to be successful at equity investing, an investor needs to exhibit traits of long term investing (patience), holding on during difficult times (perseverance) and investing in the right companies (skills). To win a test match, a team needs to a) follow the grind for the entire five days b) win more sessions than the opponents in order to emerge victorious. Likewise, to create wealth, an investor needs to a) stay invested across the entire period b) have more winning years in order to compound their wealth at the end of their investment tenure.

A team of 11 players is a combination of different styles and approaches, a diversification quality of prime essence to build a successful team under all types of playing conditions. The players will be challenged to different playing conditions and opponents and each player might not have the best skill set to perform in different environments. In the world of equity investing too, there are different styles and approaches to portfolio management. An investment style/approach, is defined as an investment strategy/philosophy, which tells us about the portfolio managers approach to portfolio construction. Some of the most renowned investment styles are growth, value, quality, momentum, dividend investing etc.

Empirical evidence suggests that quality has outperformed and remains an ideal investment philosophy for long term wealth creation.

Quality per se, as an investment style, does not have a clear outlined definition unlike Growth and Value investing. But when it comes to identifying quality stocks, in our opinion, it connotes a combination of quantitative and qualitative factors. The quantitative factors refer to stable cash flows, consistency in earnings, High profitability margins etc. Such attributes are found in secular compounding stories, which, irrespective of market cycle tend to deliver on the above parameters.

The carnage in Mar-20 saw stocks across the board witness severe drawdowns in prices. But the cyclical (High Beta) ones were the most impacted as the fear of the unknown created uncertainty in business activity. Expectations were rife about a strong bounce back in the Indian economy after a disastrous Q1FY21 GDP print of -23.9%. Given the positioning, the market preference was heavy towards cyclicals names. The below table drives home the point on how the last 12 months have been a classic play on stocks which were high beta in nature combined with low RoEs.

Different market conditions are suited for different investment styles and 2020 was the year when cyclicals were in the limelight. But to win over the long term, an investor’s portfolio needs to have an investment style which will deliver more consistently rather than in bouts.
The overarching theme of portfolio management has always been Quality. We believe so because, from an Indian context, there is a huge dispersion between performers and non-performers and one major attribute has been the quality of these companies. Second, long term sustainable growth is achieved only if quality is an inherent characteristic among companies.

Our investment thesis is derived from identifying secular compounding growth stories which are
structural in nature and have the ability to deliver for extended periods of time, rather than cyclical ones as these tend to be more volatile in earnings delivery. The proposition has worked well for us over the past decade and we continue to remain positive going ahead as well.

(The writer is Head Equity, Axis AMC)