Ajay Tyagi, Head of Equity at UTI AMC, shares investing insights from his career to help you become a smart investor
Over the last 22 years of my career, the most invaluable lesson I have learnt is to have an investment philosophy and then stick to it regardless of whatever happens in the stock market. Investors should study the past track record of the markets, study their own capabilities and find out whether they can identify an approach to investment that they feel comfortable with and which comes naturally to them. Reality is that there can never be any philosophy which would work at all times. There would be times when your core philosophy underperforms and there would be times when it outperforms. Especially during times when one is underperforming, it is important to keep in mind that markets change their narratives and reward or punish the same sector at different points in time. At such times rather than feeling frustrated and capitulating close to the bottom, an investor should look up to the investment philosophy as the North Star and just keep the faith. I strongly feel that if you stick to your knitting, you can emerge as a successful investor in the long run. As Warren Buffett said, as an investor, what matters more is your EQ rather than your IQ because it is your EQ which makes you stay emotionally stable when the chips are down.
The second lesson is don't ever lose sight of the fundamentals. The markets will keep throwing stories but you have to go back and analyse things fundamentally. If you base your calls on non-fundamental factors or on factors that are going to be relevant only in the short run but not in the medium to long run, then you are committing a huge mistake. It can work a few times but it will not work consistently and it can also lead to big unanticipated losses. This doesn't mean that fundamental research would have a 100 percent strike rate. You would still have your share of mistakes and wrong decisions but odds are that you would avoid the tail risks which can lead to huge drawdowns.
My third lesson has more to do with portfolio construction rather than stock selection. Let me explain this with an example. When I joined the industry 22 years back, IT was the darling of the markets. Such was the momentum in that sector that it was not unusual to see diversified funds having close to 50 per cent of their holdings in that single sector. However, the party did not last beyond a few years and the bubble did get pricked like it always gets.
Over the last two decades, the same has happened in the infrastructure sector, pharma sector and most recently in the tech sector. The big lesson is that an investor should never get carried away by any one theme or sector and make it disproportionately high in the portfolio. Outsized bets in any single sector can hugely increase the risks and destabilise the portfolio and therefore one has to keep the excitement in check when evaluating new businesses in sunrise industries.
As far as my mistakes are concerned, I have made my fair share in the last two decades and I still continue to make them. One example that comes to mind is that of the pharma sector about a decade back, when it was emerging as a high-growth sector on the back of opportunities in the US generics market. This seemed to be a pot of gold which was expected to help many Indian generic players enjoy high growth for many years to come. At that stage, like many others, I also got excited about the prospects of this industry and built a good exposure of such companies in my portfolio. However, what I did not factor in well into my hypothesis at that time was the regulatory compliance as well as price erosion as two big risks. Somewhere around 2015, pharma companies started to see pressure on account of these two issues and as a consequence, many companies started to witness stagnation in revenues and then a decline in revenues. Eventually this started to get baked into the valuations of pharma companies which started coming under the hammer. The big lesson learned was that one should never get too excited by opportunities that are attractive from a one- or two-year perspective. While investing, one should think like the owner of the business and develop conviction on the persistence of profitable growth opportunities well into the future.
This interview was conducted in June 2022