by Ms. Uma
Shashikant, CIEL
Investors can be
adamant sometimes. Some of them refuse to accept that it is not easy to get
wealthy with equity.
Many are simply lucky
with equity / share and fail to see the strategic choices they need to make to
be successful equity investors.
Diversified
Portfolio..!
A diversified
portfolio is the simplest way to participate in equity markets and earn average
market returns, which are not bad actually. For those seeking significantly
more, one critical factor matters most: the extent of concentration in the
portfolio.
 |
| Mr. Uma Shashikant, MD, CIEL |
The promoters of a
business hold the finest form of a concentrated equity portfolio. Many of us
drool at the personal wealth of entrepreneurs. The list of the world's richest
people is made up primarily of equity investors, inspiring so many of us to see
equity investing as the most democratic and legitimate way to build wealth. But
for every entrepreneur that succeeds, there are many that fail.
That in essence is
the power of the concentrated portfolio. It may be enough to hold the stock of
just one company to build a fortune, if the company has built a valuable
business. But, should that business fail, you may face bankruptcy.That is why
concentrated portfolios are most suitable for someone with the orientation to
create, build and run a business, than for someone choosing to be a dormant
equity shareholder. Successful entrepreneurs invoke awe and envy, but it takes
a lot to be one.
The nicest thing
happening at present in India is that a large number of youngsters are choosing
to create a business than pick up a job. This shows the swing away from fixed
income seeking behaviour to preference for a concentrated strategy to build wealth.
This significant modification in risk profile of people while choosing careers
should bring great benefits to equity investors as a community. The successful
entrepreneurs will deservedly make the most.
Angel investors,
private equity investors and venture capitalists are the next rung of investors
with a concentrated investment strategy. They seek high returns and are willing
to invest in a small number of businesses to earn that.
They are also
`inside' investors (as against public shareholders) who seek more information
and a more significant role in running the business. Many of them are on the
boards of companies they invest in.
They mentor the
business to achieve scale and size. Given the engagement levels, they have
large and significant holdings in a few businesses and take on the risk that
some of them may fail. But a few good ones make up for such losses, again
because of their concentrated holdings and high stake.
It is quite common
for successful entre preneurs to use their wealth to seed and fund new
businesses. The objective is not merely altruistic. There is tremendous
business sense in investing significant stakes in a few businesses, without
having to actually run them from the front. These inves tors are only doing
what they know to do best, but earning a higher return from being strategic
investors.
Institutional
investors like sovereign wealth funds, hedge funds, pension funds and
endowments also take on strategic investments in growing businesses. This is
the institutionalised form of concentrated investing, where the involvement in
the business is not as deep as that of the inside investor, but the stakes are
significant to make a difference to their return.
When individual
investors choose DIY (do it yourself ), they should look at the approach of
these professional investors who hold a large stake in a few stocks. The
approach is intense and driven by a high level of information and involvement.
Institu tions invest in research, data and talent to choose and invest
strategically.
The extent of
involvement de pends on the stake acquired. If there is a clear vision about
where the business should go, the investor is willing to work to wards making
it happen in return for a significant stake.
If the in volvement
is as a strategic investor, they work with the board and the management and
will be willing to process and analyse information about the business on an
ongoing basis. Therefore, concentrated investing is only for those who can do
the hard work and stay patient.
Strategic investors
do not worry about every day price or / quarterly results. The frustration of
promoters about quarterly results & market reaction comes from the relative
insignificance of this number for their own strategic reasons. But public
investors and institutions such as mutual funds, that hold diversified
portfolios, need dynamic information for their strategies.
They represent the
other end of the investing spectrum, where they hope to earn a few percentages
more than the benchmark, by using a large diversified portfolio. The intensity
of research and need for information is lesser and restricted to publicly
available information. The focus is on diversification and risk reduction, and
holding periods can be shorter.
A concentrated equity
portfolio is a choice that lies at the opposite end of the diversified
portfolio. I have noticed with amusement how investors eulogise Mr. Warren
Buffet and then mindlessly buy multiple stocks, which they believe hold value.
Warren Buffet is the world's most successful investor, because his investing
style is what we described above- concentrated and strategic.
He buys large stakes
in businesses he understands, and holds them with patience. He also specialises
in picking them up when the going does not look good.Wealthy investors in
equity are quasi-businessmen who are deeply into the few businesses they hold.
Where does that leave
the retail investor who likes DIY? A few with the penchant for business and
research do really well. They go much beyond tips, news and media quips, to
understand how a business is doing.
They work in groups,
analysing businesses thoroughly. They invest after careful selection, in a few
stocks, usually not over 15 to 20, and stay invested for the long term.This is
a high-return, high-involvement concentrated investment strategy, not in the mode
followed by most common investors.
Those who simply buy
this and that, hold a large number of stocks, and brag about the few that have
done well for them, might be misleading many others. The more a portfolio
holds, the more diversified it gets and, therefore, it gets closer to average
performance.
When it comes to
investing, there is nothing right or wrong. There is only risk, return and
diversification--or the lack of it, if you will.
About the author..
The author Ms. Uma
Shashikant is Managing Director at Centre for Investment Education and Learning.
Ms. Uma Shashikant is Managing Director at CIEL, is a PhD in finance & has been a trainer, researcher & consultant in the capital markets area since 1988.
She worked at the UTI Institute of Capital Markets (Now IICM) for ten years, during which time she has trained a range of market participants from commonwealth ministers, bureaucrats, fund managers, analysts, bank officers, and employees of various organisations in the financial services sector.
She was vice-president (knowledge management) at Prudential ICICI AMC & chief R & D officer at ING Investment Management before setting up CIEL. She had been involved in product development, process documentation, investor communication, distributor education, institutional sales and investment committee in these 2 mutual funds.
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