You must conduct in-depth research and adopt strategies based on market cycles. This is what Sanjay Chawla learnt from the stock market.
The Chief Investment Officer of Baroda Pioneer Asset Management Company says he fell in love with the market early in life. Edited excerpts from an interview:
The stock market has fascinated me ever since I was in school. What attracted me most was that seemingly random movements in stock prices become clear once business and investment cycles are understood.
The beauty of the stock market is that it challenges you every day with new data points and different views. It’s not enough to just understand business cycles, valuations, and financial modelling; there’s a degree of mass psychology too.
How did you zero in on your first investment?
Ever since I was in Class X, way back in 1982, I took every opportunity to read about how to go about investing and meeting market participants. Two years later, I started making a paper portfolio and honed my abilities over the next three years. Finally, I made my first investment in HDFC in 1987. The housing industry was then growing at a steady pace; the mortgage industry was in a nascent stage with huge under penetration, offering good growth opportunity. I own the stock even after 25 years. It has been a great compounding story!
What were your best and worst investments?
An investment that has done even better than HDFC was Sun Pharmaceuticals in 1994. I still recollect, around that time, Sun Pharma’s revenue was less than the profit of some of the large pharma companies. Today, it is the largest pharma company with a global footprint.
My worst investment decision has invariably been to sell off early! There have been times when, even after the business has given supernormal profits, the stock has delivered better-than-expected returns.
What are the lessons you have learnt?
Some cardinal principles I have always followed are that the returns on capital employed should always be higher than the equity cost; management quality is non-negotiable; it is critical to assess the competitive edge of a business and one should invest in a business he or she understands.
I believe that a single mantra does not fit the market.
Different market cycles require different investment philosophies. It is very important to identify and adopt an investment philosophy that goes with the current investment trend.
What are the common mistakes investors make in their investments?
Most of the time, investors tend to treat their investments — whether in direct equity or in mutual funds — as a trade. Their investment perspective is very short.
One should be investing as though he or she owns the business. You end up making fewer mistakes once you start focusing on long-term investing. This automatically cancels out the “noise” factor on account of market volatility.
With the flurry of IPOs lined up and given their past record, do you have any advice for investors?
The basic principle of investing in IPOs is similar to taking exposure in direct equities — business, management, valuations. The difference is that in IPOs, the management track record is not well established and one has to take an informed call on the same.
What appears to be cheap can suddenly become expensive if the company disappoints. This is what we have witnessed in recent times.