"Whether you think you can, or think you can't ... you're right"

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Henry Ford

Sometimes, the simplest of things seem the most difficult. Investing in equities can be as easy or as tough as you’d want it to be. And this depends entirely on the route you take to invest. My nigh 30 years of tracking the stock markets have taught me that while there are may be plenty of strategies for investing, there are just three basic rules to actually ensure you make a profit. I dwell a little on these three rules here.

Invest Yourself: Learn from the Masters

If you understand business and know how to read through reported numbers—financial statements disclosed by publicly listed companies—you are equipped to take a shot at investing directly in companies. Here, I’d suggest you do take time out to learn from the investment gurus, before taking the plunge. Benjamin Graham's value investing principles, which Warren Buffet abides by, is a great way to identify mispriced stocks, meaning stocks quoting at a steep discount to their true value. Another widely adopted touchstone for identifying growth stocks is Philip Fisher's 15-point checklist, spelt out in his book Common Stocks, Uncommon Profits. Or you could draw from Peter Lynch’s style of investing in a large number of promising enterprises with the expectation of some of them emerging big winners—a favourite strategy of venture capitalists and angel investors today.

Irrespective of the investment philosophy or model , you will need to invest time in identifying and tracking the businesses you invest in. Also, investing isn’t an easy exercise, and requires a lot of hard work and dollops of conviction, patience, and discipline. Remember, everyone will get an investment wrong once in a while, don’t let your ego do you in, when you do.

Go Passive: Invest in Index Funds

Vanguard’s John Bogle, also considered the father of index fund investing, highlighted several advantages of investing in index funds (mutual funds that invest in all stocks in an index, so as to mirror the performance of the index). In his Little Book of Common Sense Investing, he is scathing in his take on the investment advisory industry, or “helpers” as he likes to call them. His contention: managed funds returned about 2% less than the index on an average, and for every fund that outperformed the benchmark in a period, there was one that didn’t. He argued that the money of investors has got distributed among investment managers, and the latter are making more of it than the investors themselves. I’m sure this isn’t music to the ears of fund managers, even today. But don’t pick bones with me, take it up with Bogle.

The concept of the index fund draws from the investment argument that if an economy is going to grow, the businesses powering that economy too have to grow. And if you want to profit by investing in these businesses, you should just buy the collective lot. But because it isn’t feasible to buy stocks in all listed companies and manage these investments, the better option is to invest in an index of stocks that accounts for a large part of the market’s capitalization. This way, you get to participate in the growth of businesses without having to worry about what any individual company is doing and how one company is gaining vis-à-vis another.

What an index fund also does is help manage investment risk, especially if you are using the Systematic Investment Plan (SIP) route to invest. This because when you invest in an index fund, you buy into the same stocks at different prices using rupee-cost-averaging, i.e., you buy more when the index is lower, or cheap, and less when it is expensive. However, if you do an SIP in a managed fund, it is possible that some of your rupee-cost-averaging advantage gets netted off by the investment choices of the fund manager—who may shift money to stocks-in-favour from stocks-out-of-favour.

Entrust a Star Performer: Get your own Warren Buffett

Backing money managers is not a bad thing. If you had invested $10,000 in 1964 in the Berkshire Hathaway stock you would have earned about $274 million by the end of 2019, that’s a compoubnded annual growth rate of 20.4 percent. The investment gurus mentioned earlier have all managed money successfully for their investors. But for every money manager that has delivered stellar returns, there are perhaps ten or maybe even hundred more that have underperformed the benchmark indices. So, you need to be extremely careful about whom you choose to manage your money. Also, remember, any fee you pay or brokerage your money manager pays eat into your returns. There’s also the matter of capital gains taxes that you need to consider.

But say, you’ve decided to give your money to an investment manager, the first thing you need to check is the returns generated by his portfolios in the past, also the risk she / he takes for those returns. You must be confident of the manager’s ability to deliver above benchmark returns consistently and you should be convinced about the manager’s investment philosophy—which drives what kinds of stocks are added to the portfolio and on meeting what conditions.

Here’s a list of a few 5-star rated equity schemes that have generated healthy returns over longer periods.

Note: All schemes have a CRISIL 5* rating.

Source: Moneycontrol, AMC websites

You’ll find that some of them have had fund managers coming on board during the evaluation period. In such cases, you may need to do a lot more study about the manager’s past track and investment philosophy. Sometimes, it may also be wise to look beyond just the immediate fund manager of a scheme, in the case of mutual funds, as the fund house investment philosophy may be driven by executives at the highest levels. For instance, Axis Mutual Fund with two schemes in the list below is spearheaded by a CEO with decades of equity fund management experience.

Remember, selecting a manager to entrust your money to is not something that should be taken lightly. You need to do a great deal of research and study before zeroing in on your money manager. But if you do find the right person for the job, you can make the managing of your investments much easier on yourself.

To sum up, my 3 mantras for profits from equities: be the money manager, ditch the money manager or find that one real star manager.