How to decide where to invest and in which stocks - Motilal Oswal
How to decide where to invest and in which stocks - Motilal Oswal

How to decide where to invest and in which stocks

The big challenge for any equity investor is to determine which stocks to invest in. Considering that there are over 5000 stocks that are actively traded on the Indian bourses, it surely a tremendous task. Evaluating each of these stocks based on their financial and non-financial information is an uphill task to begin with. Additionally, transparent information and disclosure is not forthcoming in most of these companies. With research analysts focusing on the top 200 companies, there is little or no objective research on most of these companies. The primary challenge for any equity investor is to decide on the methodology to be adopted for investing in stocks. There are two basic approaches to investing in equities..

 

Employing the top-down approach to equities..
What exactly is the top-down approach? This is a logical approach wherein the decision to invest is taken by progressively narrowing down the choices. This is also referred to as the EIC analysis or the (Economy-Industry-Company) analysis. As the name suggests, the first step in the EIC approach is to convince ourselves whether the overall economy is in good shape. Therefore, there is a focus on interest rates, GDP growth, inflation rate, the level of fiscal deficit and current account deficit as percentage of GDP etc. Additionally, the government policy on industry and economic reforms is also reviewed thoroughly to arrive at the macro suitability to invest. Once there is conviction at the macro level, you drill down to the industry level analysis.

Which industries are looking attractive, whether there is earnings visibility, which industries are getting disrupted, which industries are building entry barriers, where is there a spurt in earnings growth etc? Once these questions are answered and the list of potential sectors shortlisted, you go to the next step of deciding on the company. Within these attractive sectors, you zero in on companies that are likely to outperform the sector and those companies that have the potential to grow without taking on too much debt or diluting the equity. Future growth is a key variable as are the valuations. It is only after factoring in all these variables that the investment decision is finally taken.

 

Employing the bottom-up approach to equities..
The downside risk with the top-down approach is that you miss out on the real stars in the mid-cap and small cap space as they may not conform to your EIC standards. This will mean serious loss of alpha as in markets like India, it is small and mid cap companies that really give you the alpha. In a bottom-up approach, you first focus on the company. The driver for tracking a company is some major news, sharp growth in profits, stake sale to anchor investors, positive feedback from buyers and dealers etc. Then the company is directly evaluated on its individual financial and non-financial merits. Once that is done, the industry level filter and the macro level factor are used purely for ratification. They are not decision points but probably give a clue on timing the entry into such stocks. In a market like India, it is the bottom approach that has proven to work consistently in the past. But the real challenge in the bottom-up approach is handling the volume of data.
 
Is there a more elegant technology driven approach to equities?
The answer is that there is a more elegant and tech-driven approach. In fact, imagine that you feed the financial and non-financial information of all the stocks in the Indian markets into a very powerful computer. Then also imagine that a super smart and efficient algorithm helps you sift through these mountains of data and provides elegant screeners to zero in on companies to invest in. In fact, these algorithms are so smart that they can actually compare and evaluate financial and non-financial data points in a matter of milliseconds and convert them into actionable screeners. The good news is that are such solutions available to you.

The MOSL Stock Scanner and the MOSL ACE (Advice on Combination of Equities) are two such products that provide an elegant tech-driven intelligent solution. The Stock Scanner is an elegant scanner to empower you to sift through mountains of financial and non-financial data and get your screen of stocks to invest in. The Stock Scanner goes a step further. It also customises your portfolio to your unique return requirement and your risk appetite. And that creates a new challenge! You know the stock is good but you are not sure how the 10 stocks selected by you will look as a portfolio. That is where ACE comes in. By evaluation correlations and mutual co-variances of stocks in the portfolio, it gives you precise advice on how best to combine your selected stocks to create a portfolio that will maximize returns for a given level of risk.

 

So, now you can become a stock picker yourself..
The idea of the Stock Screener and the ACE is to enable and empower you to become a skilled stock picker. Now you do not have to rely on tips and stock ideas. You can actually build your own portfolio with the combined power of the Stock Screener and the ACE. Remember, these elegant tech-driven products are not just about putting more data and processing power into your investment decisions. They are also about empowering you to become a self-starter in the process of creating and managing your own smart portfolio!
 

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