Saurabh Mukherjea suggests 2 tools to cut risk in your equity portfolio
If you are one of Buffett’s adherents who buys and holds stocks for the long haul without interfering with the silent but magical power of compounding, you may experience significant short-term suffering. In addition to macro concerns like war, inflation, recession, or rising interest rates, the stock price occasionally may decline owing to internal corporate governance problems at the company or an incumbent that poses a danger to the market leader’s supremacy.
A long-term investor faces two main dangers, according to Saurabh Mukherjea, Dalal Street’s go-to stock picker: the risk of underperformance brought on by investments in subpar businesses and the risk of short-term changes in stock prices. Increasing the investment horizon from one year to three years will assist investors to reduce volatility, according to Mukherjea, who operates the PMS firm Marcellus. The longer the horizon, the smaller the noise.
“The elements of risk that cause short-term swings in share prices are narratives and expectations. These dangers have little to do with a company’s long-term fundamentals. This is the case since short-term price changes largely reflect how the market perceives the relevant company. Such beliefs also reflect the market’s propensity to project short-term performance out over a long period “According to a note to investors from Team Mukherjea. He used Asian Paints as an example, stating that during the 18 months from July 2010 to December 2011, the company provided zero absolute return due to worries about the effects of huge input cost increases on profit margins and a lack of a crucial raw ingredient.
The second strategy from Mukherjea’s playbook involves increasing the average rate of compounding by concentrating on top-tier businesses. Even if investors are extremely unlucky with timing their entry and exit, the potential drawdown will be lower the higher the expected rate of long-term compounding of share prices, according to the renowned investor and author of best-selling books like “Coffee Can Investing” and “Unusual Billionaires.” The absolute returns for Mukherjea’s consistent compounder stocks are anticipated to have a lower downside and bigger upside compared to an average “good quality” portfolio and the Nifty50 index because of a high median return.