‘Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas’. While this holds true for the long-term investment approach, we see a lot of investors/traders focus on timing the market entry/exit based on news/events. We should understand that a single parameter cannot impact the stock price movement even in the short term. At any given point of time, stock prices are a function of multiple data points at play.
The macro one — Liquidity: ‘In 1929, the stock market crashed signalling the beginning of the great depression’. Liquidity is one of the universal drivers for any asset class and can defy fundamentals and to a large extent can change fundamentals for a lot of companies. Indian markets have witnessed such liquidity-driven rallies in the past; and the recent correction from the high was also due to the US tapering and FII money moving out. Further, companies which depend on capital market accessibility to raise funds and run their businesses will have a strong impact either side on how the liquidity moves For eg. NBFCs, which didn’t have enough capital to tide over Covid-19 delinquencies, suffered massively on business fundamentals during the time.
Having said that, fundamentals are the single largest driver of the stock price over the long term. And if anticipated correctly can yield superior returns than any other parameters discussed. We, as long-only asset managers, do study these parameters like price movements, technical charts, etc. for a holistic approach. However, our stock picks are primarily based on fundamental parameters for a long-term wealth creation journey.
—The authors, Mridul Jalan and Sweta Jain, are co-founders of Senora Advisors, a financial advisory services firm. Views are personal
(Edited by : Ajay Vaishnav)