Investing and shopping have more in common than you’d think

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Whether you are a seasoned investor or a novice, the world of investments can seem to be a daunting place fraught with several challenges. Hundreds of companies are traded on our exchanges every day and multiple financial advisers/experts have different perspectives to offer. Since investors are subject to market ‘noise’ at every turn, it is easy to fall victim to the cacophony around and lose sight of the intended objective.

Think of it like shopping. How often do we indulge ourselves in impulse buying just because we liked the colour of a particular dress or a product was on sale or maybe we just needed that extra bar of candy because it looked too tempting? The answer is almost always and we are all guilty of it. You leave the house with the intention to buy only one particular item and the next thing you know, you are lugging 5 shopping bags back! Come to think of it, most times these impulse purchases end up stuffed at the back of our closet or being unused or are the reason for unnecessary spending.

We all love a good bargain, but how often do we lose sight of quality, opportunity and need in its quest? On any other day, we actively seek for products that are high on quality and long lasting. In fact, most of us are willing to pay a premium for ‘good quality’ products. The overall life of the product and total cost of ownership hold significance over the initial cost of purchase. There is a reason we go back to age old brands or brands that we are comfortable with – they offer us quality, not just in terms of the product but also the service. The same principle applies in investing.

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Consider the chart below which shows the annual returns of MSCI World Quality Index versus MSCI World Index over the last few years. You can see that the Quality Index outperformed in most years. What may be of interest to many investors is the observation that Quality almost always outperformed in volatile markets.

Irrespective of the ultimate financial objective, investors must proactively consider investing in companies that promise ‘quality’. Take for instance, the financial sector. The improving asset quality in select names, has resulted in strong operational results leading to strong long term earnings growth prospects. The new-age investors are expected to prioritise good valuations and long term returns that will meet their objective. Given the current macro-economic indicators, investors are urged to adhere to the basics of a ‘fundamentals’ driven investing approach that emphasises on healthy consistent growth, quality of cash flows & RoE (return on equity) with 3 to 5 years’ view. A bottom-up strategy that concentrates on the company’s potential will be instrumental from a long-term viewpoint for wealth creation.

Quality in investments must be supported by diversification across assets and styles. We don’t own just one pair of trousers and a shirt. We own several different items in various colours, styles, sizes, etc and depending on the occasion, we decide to style ourselves. Similarly, a well-diversified portfolio has the potential of earning risk-adjusted returns as well as enabling exposure to various asset classes through structured allocation. Diversification across asset classes can be further complemented with diversification across various styles (growth, quality) allowing investors to leverage multiple opportunities in the market.

Furthermore, a company’s management pedigree is a direct indicator of the kind of governance and diligence one can expect. While it is important to know by how much a company has grown, it is equally imperative to understand ‘how’ a particular company has achieved these numbers and ‘who’ has supported them.

With all the news flooding the market, it is easy to get swayed by the surrounding noise and lose sight of the investment objective. These behavioural biases (whether cognitive or emotional) could ultimately result in hampering the portfolio in the long run. What investors must understand is that prudent investing requires a ‘quality’—driven approach that is laid on the solid foundation of logic, research, data and analysis. By adopting an objective outlook, investors can prevent themselves from falling prey to irrational decisions.

Historically, quality stocks have been known to deliver consistent performance irrespective of investment cycles. Hence it is important to remain invested in these stocks over several investment cycles to benefit from the power of compounding across different conditions. As such, quality investing may be a good strategy to invest for your long-term financial goals as well. Sure, there are fads that may sway the consumer from time to time. And while it is good to experiment once in a while (of course, after thoroughly researching), ‘quality’ should not take a back seat.

(The writer is equity fund manager at Axis Mutual Fund)