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Investment lessons in volatile times

Shah: Showing the way

Calcutta, Dec. 9: Equity investors could follow the buying strategy of Warren Buffett — the most successful stock picker of modern times — to profit from market volatility.

Nimesh Shah, managing director and CEO of ICICI Prudential Asset Management Company, today told The Telegraph that an investor could follow the philosophy of “buy on bad news and sell on good news”.

Buffett’s philosophy involves identifying the intrinsic value of the stock based on the future earnings power. Price earning ratio could be a suitable indicator.

“Volatility is actually a good situation to take advantage of. It tends to mis-price assets, providing attractive opportunities for an agile stock picker,” Shah said.

“When there is bad news in the market and everybody else is selling, and you have the confidence in the economy, then you could make money,” Shah said. He said an investor needed to consider two aspects — asset allocation and setting up of pre-set entry and exit targets during volatile market conditions.

“One of the acceptable indicators to determine if the overall market is over or under-priced is the price earning multiple (PE ratio),” Shah said. The PE ratio is a valuation of the current share price compared with the earnings per share. Higher PE ratio means investors can expect higher earnings.

Shah provided an hypothetical example: to elaborate his point: if five-year average PE multiple of Sensex is 15 and present multiple more than 15, investors should sell and move to debt; the reverse needs to be done if current multiple is less than 15.

He said FMCG, pharma, telecom and technology had been popular. “There is a lot of polarisation at present with some (sectoral) stocks of Nifty going up, while the others are falling,” Shah said. One can make profit by holding stocks in segments that are underperforming at present, but can bounce back once the economy recovers.

Setting entry and exit targets is an important part of this strategy. “If a company has traded in the range of Rs 450 and Rs 700 in the last one year, an investor can consider entry and exit prices at Rs 525 and Rs 650,” Shah said.

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