It’s a half-truth that you invest in Stocks. Confused? Let me clarify. Whenever you are investing in stocks, actually you are investing in businesses. While buying stocks, you become the owner of the company in proportion to your investment. This awareness might change your perspective towards investing and picking up direct stocks.
One of the most in-demand TV shows in India was “Shark Tank India” in 2022-23. Further, in the upcoming year, a new season is expected. In this show, entrepreneurs present their business information in front of investors (Sharks), and based on some parameters sharks decide whether to invest in this business or not.
The sharks (investors) of season 2 were
- Lenskart CEO – Peyush Bansal
- com founder – Anupam Mittal
- Sugar Cosmetics CEO – Vineeta Singh
- Emcure Pharmaceuticals head – Namita Thapar
- com CEO – Amita Jain
- boAt founder – Aman Gupta.
According to the reports combined investment made by these sharks in season 2 is more than Rs. 81 Crores.
Here are some lessons we can learn through this show, which will enable us to make a wise investment decision and retail investors will be able to understand the grounds on which this decision should be taken.
Understanding and Investment go hand in hand!
“Don’t invest in something you don’t understand.” – Warren Buffett
You must have heard sharks saying that I am not an expert in this business, hence I am out. The point here is every person has different expertise, some are finance experts, some in technology, some understand marketing, pharma or real estate etc. Every business falls under a sector which has its pros and cons. Sharks did not invest in a business if they didn’t understand the business model.
This is applicable if you are investing in stocks directly. If the pharma sector is performing better, it doesn’t mean that you should invest in pharma stocks or Pharma sector Mutual Funds. But, if you are working in an IT Company, then probably, investment in the IT sector will make sense for you, as you understand the ups/downs of that sector. And you will also make a better decision, if you know what domestic & global factors impact the IT industry.
Otherwise, you can invest in well-spread Mutual Funds to diversify your portfolio. But, sectoral investment is very risky unless and until you know about in and out.
Diversify Investment: Reduce Risk
“Don’t put all your eggs in one basket” – Warren Buffett
Another important line that sharks usually say is that I have already invested in this type of business, hence I am out. The reason is that sharks also diversify their investments and do not invest a lot of money in similar businesses. The logic behind this is if that particular sector is facing a slowdown, only part of investment will be affected. And other investment is not going to affect.
Know your Risk Appetite
At times, entrepreneurs did not get the entire amount that are expected. Sharks always decide the investment amount according to their risk appetite and inherent risk in the business.
Similarly, you should also judge your risk profile and invest accordingly. Some sectors are very sensitive to investment such as technology as it changes rapidly. On the contrary, some sectors like FMGC (Fast-Moving Consumer Goods) are comparatively lesser risky.
Valuation matters in Investment
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
Picking the right business is important, however, the more important thing is to pick it at the right price. Hence, sharks always identify the valuations of business and if not satisfied, they ask how they arrive at this valuation. Picking undervalued stocks or investing more money when the market is undervalued or fairly valued is a key to creating wealth in the long term.
In many cases, sharks were not convinced of the valuation of the company. And they did not approve the valuation that the entrepreneur was asking for. Likewise, you should also check whether the price that you are paying is fair and below intrinsic value. The price to Book ratio (P/B) of a company as compared to its peers, is one of the indicators to identify this.
The fundamentals of investment is to study fundamentals.
Before investing, knowledge about revenue growth, consistency in revenue, bottom line (profit), product line, and market scope is necessary. You must have noticed, that sharks asking these questions. This is nothing but a fundamental analysis of business.
You can get the information from companies’ official websites wherein they publish their results or you can get it from articles, newsletters etc.
In short, while investing in stocks on your own, you will have to dedicate your precious time to picking 10-15 stocks to create a diversified portfolio. And you will need to review it frequently. You should acquaint yourself with Macro and micro factors that can impact a particular sector. If you can do this, you can go ahead.
Otherwise, the relatively easier route of investment in Mutual Funds.
You can choose Mutual Funds for different purposes as a Fund Manager will utilize his expertise to invest. For Short-Term to Medium-Term, Hybrid Funds can be considered. For long-term investment, Large-Mid cap, Multi-Cap, and Flexi-Cap can be a good choice. You can invest sector-specific according to your expertise. Investment in Mutual Funds will provide you the benefit of Market-Cap and sector Diversification and liberty to choose your investment amount.
Pick up whatever route, but invest.