It's safer to buy shares of larger companies

Although the Sensex soared a little over 500 points on Friday, this year so far has not been exciting for the markets. On May 6, the Sensex fell 723 points translating into Rs 2.89 lakh crore fall in market capitalisation and a 2,400 point drop in the Sensex in the last three weeks. This was the second-largest plunge this year, the largest being 855 points on January 6.

It fell another 116 points on Wednesday. Additionally, the rupee has also been plunging against the dollar to below Rs 64, a 20 month low before recovering at 63 levels. Why?

There are several reasons: Foreign investors felt they were overbought in Indian stocks and have sold out in preference of China, Korea and other countries, where they feel the potential is much greater. Additionally, foreign institutional investors had concerns regarding taxation, the delays in the passing of reform bills, corporate results not being as good as was hoped for and Brent crude prices heading towards highs of $69 per barrel.

I believe as a nation we believed that with a new government under Narendra Modi the entire country would be transformed into a land of plenty. I believe all of us got carried away.

We did not realise the extent of the task in hand in this euphoria. There is much to be done. We have to give this government a chance to battle sometimes what appears to be insurmountable odds to create the country we want this to be. It is not going to be easy and it will take more than one year for this to happen.

In the meantime the question is how you, as an investor, should view the market. Should you invest or should you not?

It was time that the markets corrected and reality stepped in. I believe the euphoria last year was exaggerated. Euphorias always are. And after a year when one realised that it was far too optimistic, the markets began a process of correction. Markets are driven by perception.

Having said that, in spite of everything I believe that the stock market continues to be an investment avenue that cannot be ignored. The Sensex may not soar to the heights one yelled last year – 40,000 and 60,000 – but there will be a significant gain every year. Those companies that are intrinsically strong and well managed will do well. The ones I fear are those that are managed and controlled by one or two persons who have their own comfort and well-being at heart and not of their stakeholders. Unfortunately there are many such in India – companies that were beacons until they fell into the grips of a buccaneer.

The companies you should consider are those that manufacture products which will be in demand for the foreseeable future or services that are in demand. These could be banking, infrastructure, FMCG, cement, paint and the likes. In these industries choose the leaders because it is they that would lead the pack. There are several large companies whose performance as far as price appreciation is concerned has been terrible. I think if you have these you should divest them. If during the last year when everything was rosy they did not rise – then in this year when the tides are turning, it is unlikely they'll rise. More likely they will fall.

Over time, it has been proven that careful investment in equities has yielded excellent results even in the worst of times. In my experience if one does not spend hours analysing and checking price movements it would be safer to buy shares of the larger companies. They are often well managed and have greater resilience. I would also opt always for professional management vis-a-vis family management. In these too, there are of course exceptions because I can think of several family managed companies that are run well. With regard to midcaps, though many have done well, you may gain if you are very knowledgeable or very lucky. Not because they are bad, but they are not as strong as the bluechips.

In short, buy shares but be careful in the purchase.


The writer is MD, Cortlandt Rand, and an author.