Sandip Sabharwal was head of equity, SBI Mutual Fund. Some of the prominent and successful funds he managed are Magnum Contra, Magnum Taxgain and Magnum Global. His success caused him to be named the 'Business Standard Equity Fund Manager of the Year 2004-05'.
Today, he is chief investment officer, Lotus India Asset Management Company.
Here, he advises readers on equity and shares his views on how to pick a stock.
His message to investors
Expectations are more realistic now than they were a few years ago. In 2000, investors were expecting a 100% return. Today, expectations have toned down.
Investors in equity can expect returns in the vicinity of 15% per annum. Compared with other investments like National Savings Certificate and Public Provident Fund, which give a maximum of 8% per annum, it is by far a superior investment.
I would not advise any investor to enter the market on his own. The market is way too volatile now. It is best to use professional help and invest via a good mutual fund.
It is boom-time for IPOs but that does not make them any less risky. You may want to sell your shares soon after listing but you can never be sure the price will rise.
Also, given the way oversubscription happens in most IPOs, you may just get a small number of shares allotted to you which does not make sense if you are looking at a quick buck. (Read Understanding IPO jargon to understand the terms 'allotment' and 'oversubscription').
The thought process of the investors must change. Don't speculate. Invest with a three to five year time frame in mind.
Equity is a long-term game and those who stay in for the long haul end up making a lot of money.
On the kind of an investor he is
I consider myself an aggressive investor.
I make up my mind on which stocks I would like to take a bet on. If I believe in it, I pick it up whether or not it is fancied by other investors. Then, I hold onto it with conviction.
I have my own investment philosophy which is not a replica of any of the past investment gurus. A fund manager must have his own style. He can learn from others but must ultimately cultivate his own philosophy.
One also needs to be focused in this field. If I believe in a stock, I am willing to stick to my belief without getting concerned about what other investors are saying about it.
Right now, there is a deluge of money in the market from foreign investors. For them, to buy into mid-cap stocks makes no sense since they are largely illiquid. So money is going into large-caps.
As a result, a large majority of mid-caps have underperformed. So they could be a good investment right now.
Conviction comes from experience, being successful and with time.
One also needs to learn from past mistakes after all the market is above everyone.
On the type of stocks he looks for
I prefer growth stocks.
Before investing in a stock, I would typically like to be confident of the long-term growth prospects of the company. Ideally, the stock should have the ability to perform even in adverse market scenarios and provide a positive return.
Right now, everyone is looking at capital equipment and infrastructure because there is no momentum in tech stocks. But momentum dies fast, that is why I am very strong on fundamentals.
It depends on the company in question.
If the company has huge cash flows and has stopped growing in a particular sector, then diversification into other businesses is all right because the cash generated is not being utilised to enhance returns.
But this is not advisable for companies in the growth phase.
On his stock valuation
When making a base case for the stock, I look at intrinsic valuation.
I then look at other comparative valuation tools to evaluate the stock in the context of today's scenario.
For instance, take cement stocks. A year to two ago, cement companies were showing losses. Today, the demand has shot up. And in a lot of cases, the demand is greater than supply. This has led to huge profits. In this case, the intrinsic value of the company has remained the same but the environment has changed.
On his stock picking strategy
I largely use the bottom-up approach for investing.
I feel that top-down is suited for more mature markets. Of course, there are exceptions.
For instance, I may identify a theme (like infrastructure). I may be of the opinion that this sector will do well in the days ahead. So this will lead me to identify good stock picks within this sector. So, over here, I have used the top-down method.
The parameters I use to pick stocks will vary from business to business.
For instance, let's say I am looking at a commodity stock. In such a case, I will not lay as much emphasis on managerial capital and ability to grow the business. I will look at the cycle of the business. Is there an upturn round the corner? If yes, is the company in a position to capitalise on the growth prospects ahead?
But in growth companies like software, I will look at management ability and capability to drive shareholder value.
Evaluating a company is not totally scientific. There is a place for analytics but other issues like management, future business environment, the competitive positioning of the company, the potential of the business in which it operates, if there is and will continue to be a market for its goods or services are other factors to look at.
That is why I feel investing is more of an art than a science. Astrology on the other hand is very, very scientific. The rules have been laid down over the years and cannot be changed. It is an intelligent understanding of those rules that get results.
Gut feel and experience don't make you a good astrologer. For a stock picker, these play an important role.