Make stocks the pivot of your investment strategy

During these gloomy days, the question that looms large is what one's investment strategy should be. The stock markets no longer command the euphoria they did a few months ago.

The rupee is now not as strong as it was, and with concerns on Greece defaulting there is some trepidation. Though the weather gurus have said the monsoon is not going to be good, it seems to be so far. Inflation, in spite of what the papers say, is very high. If you look at the way the price of essentials such as vegetables have zoomed, it is difficult to accept that inflation is only around 5% per annum.

The base of one's strategy has to be that investment income must exceed inflation – the more the better. If it just equals inflation, then you are literally running at the same spot and if it is less than inflation, the purchasing power of your money is falling.

Having said that as long as there are differences in age, the propensity to spend, the source of income, the risk appetite, the objective, the knowledge on investing and the investment horizon the strategy will be different.

While developing a strategy I tend to follow the Roman Titus Plautus' words, "In everything, the middle course is best. All things in excess brings trouble." In India too there is a similar saying, "Too much nectar can be poison."

First of all you should invest in what you understand. Otherwise, you will not be able to make a meaningful decision. If you do not understand shares do not touch them. If you do understand shares but do not know the product a company is making or you do not know anything about that company keep away. Or alternatively learn about the company and then make an informed decision. Do not invest because an investment manager or a friend has given you a tip.

Start investing as early as you can. Warren Buffett, the wizard of Omaha, gifts his grandchildren shares. He has been doing this from the time they were born. It is never too early. The reason I say this is because investments will grow in value – whether they be shares or real estate or some other. Shares, in spite of the global meltdown in 2008, have had a compounded annual growth rate of 18% in the last 20 years. That is not to be sneered at. When I first came to Mumbai in 1978, the price of a flat in Napeansea Road was an astronomical Rs 300 per square foot. People swore it was overpriced. Prices today are Rs 120,000 or more per square foot now.

One should invest periodically, not in fits and starts. One should have a pattern. Ideally one should invest every month a portion of one's income and the earlier one starts the better. I know an individual who told me that he had invested 25% of his salary every year since he began working. Today at 65 he is very comfortably off. He is an exception to the extent that it is rare to find such a person. If one invests something every month – the money one can spare he will be following a good strategy.

A very important rule is to separate emotions from objectives. Investment decisions have to be made by the head and not the heart. You cannot buy a share because the name sounds good or a friend works there. The decision must be based on hard facts. And if a company is not doing well you cannot retain it because it was the first share you bought. Sell it and cut the bond.

Another aspect that you should consider is what you spend on. Just because you have money must not compel you to spend more. There is no need to buy another car or go for another expensive holiday. That extra amount should be invested.

You should also make stocks the pivot of your portfolio. This is because these have grown the most consistently over the years. Additionally it is extremely liquid unlike real estate.
Finally, you should review your portfolio periodically. It is not necessary to do this all the time but it should be done periodically. You should then upgrade it by getting rid of those that have outlived its potential and bring in new ones that have promise.


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