“If the valuation is high and growth is also high, it is a speculative thing. When growth is high and the valuation is low, that’s when you get a multibagger. This will work in an equity market anywhere in the world and at any point of time,” says the Chairman and co-founder of Motilal Oswal Financial Services.
But picking the right stock and sticking to it for long enough till it matures into a multibagger is not easy, unless you follow a sound investment philosophy.
“There is no one particular way of making money in the stock market. There are a million guys out there, and there are a million ways of making money. Everybody will have a different way. And that’s the fun of the market,” says Agrawal, himself a successful value investor.
At a retail investors’ conference organised by online investment platform Groww on Saturday, Agrawal listed out 10 commandments, which he said have helped him mint money in stocks over the years.
- Invest in equities, don’t speculate
“If you want to have fun, you can go and speculate in equities. But if you want to seriously accumulate a lot of wealth, investing is very important,” Agrawal said, adding that it is a bad way to start your investing journey with speculation. He said he has not come across anyone who is a 100 per cent speculator and yet has managed to amass huge wealth. Investors are those looking for a change in value, while speculators and those who look for a change in price.
There are 100 million investors who are trying to time the market and outsmart everyone else, but it is impossible for somebody to have the foresight as to how a stock will react for the next few years, says Agrawal. “Don’t waste your energy in trying to figure out the market, use all the energy to figure out which stocks to buy next.”
- Master the power of compounding
In investing, the power of compounding is as powerful as an atomic bomb. “The whole market is only about compounding, but nobody gets it in practice,” he said, while giving the example of how if the money doubles in five years, it goes up four times in 10 years, 16 times in 15 years and 32 times in 20 years. “Once you have got the right stock, sit through and don’t try to time the buying and selling.”
Everybody knows the price of everything, but the value of nothing. “That is the biggest opportunity in the market. Even in today’s digital age, if you dedicate yourself to understanding the value of stocks within your circle of competence, you will start winning,” says Agrawal.
- Buy only those businesses which you understand
Before investing in a stock, try to understand the company first. “If you understand the company better than or as good as the owner, then you can predict the future of the business in an easy way. You cannot understand the future value of the company unless you understand the business today,” Agrawal said. Summarising Warren Buffett’s investment process, he said investors should look for a business she understands, which has favourable long-term economics, has an able and trustworthy management and wears a sensible price tag.
- Assess the management thoroughly
Figure out not only a competent and passionate management, but also the one with high levels of integrity. You can find out more about the management by talking to the company’s competitors, former employees or even the auditors. “If you have a terrific management competence and solid management integrity, it will lead to a fantastic investment universe. And if you don’t have any one of them, you are into some kind of trap,” says he.
- Look for sustained quality and growth
When you get high quality and high growth, true wealth creation happens. “Quality alone is fully priced in this marketplace. Growth alone is also more or less prized, but if something doesn’t have quality, it won’t sustain,” says he.
You may not always be able to buy stocks cheap, you have to pay a reasonable price. “But make sure you are not overpaying. If the fair price is Rs 20, you might pay Rs 20 or Rs 25. But if you pay Rs 50 or Rs 100, you’re locking yourself into trouble and underperformance for many years,” the market guru said. “Always look for a margin of safety, which is the gap between value and price.”
- Have a vision, courage and patience
You need to have a vision to buy into the future of a company and the courage to be in the market. “Patience is a must to make a lot of money because compounding will work only for those who have patience. If you have compounding for 20-30 years, even one or two stocks can make you very rich,” says he.
Giving the example of Tesla, Agrawal said the way the stock is being valued today, it won’t have been the case 20-30 years ago. “There are new opportunities, new businesses, new managements, new ways of looking at things, and you have to keep reading. I don’t think there is any alternative to that to keep making money in the stock market.”