Shreyash Devalkar, Senior Fund Manager, Axis Mutual Fund, shares investing insights from his career to help you become a smart investor
Over the long term, sustainable wealth is created by quality and growth companies. These attributes in a company have historically transpired in steady compounding and lesser volatility during rough markets. Over the years, growth has been more about compounding. If growth is sporadic in a year or two, timing matters a lot while stock-picking, for instance, in the case of commodity stocks, wherein they can become multi-baggers for a year or two. While in case of structural growth stories, steady returns are possible. Secondly, the growth needs to be higher than nominal GDP growth for the stock to be able to create relative wealth.
On the quality front, we focus on quantitative elements like management, governance, etc. These quantitative factors form the bedrock for investment. The key quantitative parameters that reflect the quality of businesses are return on equity (ROE), leverage (the lesser the better), free-cash-flow-to-PAT ratio. The P/E multiple that a company fetches is the outcome of these quantitative parameters.
Continuous focus on disruption is essential to avoid mistakes. Quality and growth companies are normally expensive in the market, and disruption tends to cause de-rating in the same. These disruptions are mostly technology-led. The important assessment here is whether the companies you own have the potential to adopt that tech change. If they can, these are good investments or else, valuation takes a hit. One can identify these disruptions by being extremely watchful. However, the disruptions caused by the pandemic or the war tend to be sudden in nature and difficult to predict.
Geopolitical/pandemic-led disruptions have not affected investment decisions in the last couple of decades, as much as they have affected the investment outcome in last couple of years. Most disruptions earlier were led by economic cycles (e.g., global financial crisis), whereas since the last couple of years, the pandemic and war have caused sustained disruption which is difficult to predict.
This interview was conducted in June 2022
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