Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
 
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Motilal Oswal Asset Management – Buy Right Sit Tight Insights - May 2016

Blogs Blog Details

Mr. Raamdeo Agrawal

Chairman, Motilal Oswal AMC

Dear investor friends,

I am pleased to present the fourth edition of our “Buy Right Sit Tight Insights”. Through this series, we will share with you our investment insights and other ideas which we believe are relevant to the world of equity investing.

In the first two editions (July 2015 and October 2015), we covered some aspects of our investment philosophy – QGLP (Quality, Growth, Longevity, at reasonable Price). The third edition touched upon the issue of rationality of markets over time.

This time, we highlight the asymmetric payoff in equity markets, and how it works in favour of patient investors.

Equity markets – the asymmetric payoff

Recently, I realised that the maximum downside in any stock is 100% i.e. the stock price falling to virtually zero.  However, there is no limit to how high a stock can go. This is a situation of asymmetric payoff i.e. limited downside, unlimited upside.

This asymmetric payoff is inherent to equities, yet at a single stock level the risk is very high. The same can be significantly reduced / nearly eliminated at the diversified portfolio level. Let’s take an example of a 5-stock portfolio with equal weights as tabled below.

How the asymmetric payoff plays out

If you have only Stock 1 or 2, it’s a total loss. Stock 3 would take you nowhere. Stock 4 will leave you somewhat well-off. Only Stock 5 will make you seriously rich.

However, at the portfolio level, despite almost three gross mistakes, you will make healthy returns, even more so over the long term.

How to make the asymmetric payoff work for you

Based on the discussion so far, two investment actionables can be derived to benefit from the asymmetric payoff of equities – (1) Limit the downside, and (2) Maximise the upside.

Limit the downside (i.e. Buy Right)
As the popular quote goes, “There are two rules to investing – Rule no. 1: Never lose money and Rule no.2: Never forget Rule no. 1!”

Limiting the downside is all about buying right, and buying right is all about building a portfolio of quality stocks with healthy long-term earnings growth at a reasonable price. (This is captured in Motilal Oswal AMC’s investing style acronym – QGLP – Quality, Growth, Longevity, Price.)

Maximise the upside (i.e. Sit Tight)
Having bought right, the best way to maximise the upside is to sit tight i.e. have tremendous patience to tide the various market cycles over a very long term. As has been said, “To make money in stocks, you must have the vision to see, the courage to buy and the patience to hold. Patience is the rarest of the three.”

I have realised that to make serious money in the market, you don’t need too much money. You need to put small amount of money and back it with a large amount of patience. It also means you have to start early to reap the full benefit of this Buy-Right-Sit-Tight process.

In conclusion

Equities offer a highly asymmetric payoff for the patient investor. As an investor, if you believe you have the necessary operational and behavioral skills, go ahead and invest in the stock markets yourself. If not, do hand over your hard-earned savings to a fund manager who has these skill sets.

In either case, do not miss out on the asymmetric payoff opportunity of equity markets.

I welcome your feedback and suggestions for improvement. Please email the same to insights@motilaloswal.com.


Thanking you,

Raamdeo Agrawal

Chairman


Disclaimer

This bulletin has been issued to explain our investment philosophy. The information contained in this document is for general purposes only and should not be construed as investment advice to any party. Readers shall be fully responsible / liable for any decision taken on the basis of this bulletin. Past performance may or may not be sustained in the future. This bulletin is not for circulation in general and is meant for intended recipient only. The bulletin does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


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