Bet on equity, by picking the right ones

Equities are in the doghouse right now — and it is the best time to go stock picking. Nevertheless, investors need to make the right bets when they go bottom fishing. one has to  focus on specific companies rather than sectors even though several verticals have looked very attractive in the current meltdown in the markets. The current market is safe for investing. However, the real pay-off will come from your ability to pick the right bunch of mispriced bets. Even though several sectors look interesting, it’s all about picking the stocks of the right companies. The retail investor must bring his own competency to figure out how much a company will make in the next five or seven years and whether he is paying a price higher than that or significantly lower than that. Since the start of this calendar year, the BSE Sensex has plummeted nearly 18 per cent from 20500 levels. One outcome of this fall and the recent volatility is that the character of market and investing has changed with investors now more focused on index movements even as they have withdrawn from the equity markets. Earlier, it was more of an investing market where investors did not bother much about index movements. Now the whole talk is about where global markets or local markets are headed. Investing is not about markets, but finding businesses or companies who can make a lot of money and buying a small piece of it. To me, Indian equities will remain one of the best-performing asset classes over the next decade, and the arguments are far more compelling now that the markets have corrected sharply from their highs. The lower the market goes the better for investors. This comes even as price-wise the markets have entered an “under-valuation zone”. The price to earnings ratio (P/E) for the Sensex has eased from a multiple of 26 to 27 to a multiple of under 14 at present. The long-term average PE (for Sensex) has been 14.5. Therefore, we have now entered a historical under-valuation zone and we have breached the average PE multiple.  However, are we close to the bottom? I cannot say that. However, if it tumbles to a PE multiple 10, we will have reached an absolute bottom. Investors have been spooked by the slump and are clinging to the sidelines, waiting for the storm to blow over. They are afraid to make a mistake and suffer big losses. In investing, you have to learn to pardon yourself for committing mistakes. Please do commit mistakes; an individual who commits more mistakes eventually becomes a sane investor.