How Can You Capitalize on Uncertainty?
November 28, 2019 | 14029 Views
There have been widespread media announcements that India’s economy is slowing down. A number of reasons have been attributed to this slow down – lower purchasing power and demand, high bank NPAs, insufficient growth in number of jobs and so on. However, do keep in mind that while growth has been slower than expected, the economy is still growing. Taking issue with this kind of ‘weaker’ economic growth is more of a political stance than an investment mindset – stocks don’t care if growth is slower than average. Growth is growth, and as long as corporate earnings are increasing, stocks can do just fine.
At this stage of the economic, political, and bull market cycle, however, there is one factor that there seems to be no shortage of: uncertainty.
Since the Finance Minister, Nirmala Sitharaman announced a reduction in corporate taxes, combined with the government’s thrust on infrastructure growth, steps to increase the number of jobs for the youth of the country, addressing the bank NPA issue and other relevant reforms, led to the stock market rallying. The government appears to be determined to achieve the dream of the Indian economy reaching the $5 trillion mark and while there is some uncertainty about how this will be achieved, there is an expectation of work-in-progress to achieve this.
Uncertainty leads to opportunities
This uncertainty about how the government will step up economic growth has led to volatility in the stock markets. We, at StockAxis, strongly believe that volatility offers attractive opportunities of earning multi-bagger returns to investors. In Warren Buffett’s annual letter to shareholders of Berkshire Hathaway, he sums it up about as good as anybody can, and his words fall into line with our philosophy here at StockAxis. His quote:
“During scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted.”
The future is already accounted for in the markets
The present value of the stock market usually is a reflection of future expectations. This means that a bear market ends before businesses and the economy turn around. Investors and speculators ‘discount’ future events months in advance. In other words, the stock market is a leading economic indicator, not a coincident or lagging indicator. It will react to what is taking place and what it can mean for the nation.
Be upbeat about uncertainty
Equity investing is a long-term game where the certainty of making profits increases with the length of your investment timeframe. The key is to invest in companies that are leaders in their industry group run by honest and competent promoters, with sustainable high margins, strong sales growth and high return on equity. Look for companies in new-age industries with unique and superior products. Uncertainty will help you enter these stocks at attractive valuations resulting in lower equity risk and higher returns.