7 easy ways to widen your equity investment profit margin

Earning good returns on investment includes not just diversification but also constantly rebalancing your portfolio on a continuous basis.

Jan 19, 2019 05:01 IST India Infoline News Service

If you were to ask a class of finance professionals how to improve the performance of your investment, their typical response would be “it depends on the current market conditions.” This is partially true, but what matters more is what you do with the market conditions.

If you are also looking to increase on return on investments, here are seven ways to improve their performance.


 
It is all about looking for a bargain sale
 
When it comes to buying furniture or clothes, we all tend to love bargain sales. Ironically, when it comes to equities, we always try to buy it expensive. Just think about equities you would think about buying your furniture. If you get a chance to buy fantastic stocks at dirt cheap prices, then why not! That is the best way to enhance returns on your portfolio. Imagine having bought quality stocks at bottoms of 2009 or 2013. You would be sitting on a fortune by now.
 
Keep your turnover and costs low
 
You can never enhance your investment returns by jumping in and out of stocks. You need to stay with the good stocks as long as it makes sense. Trading may appear to be a lot of fun, but in the process, you add to your transaction costs and miss a lot of interim price movement. Instead, you could have just stayed put.
 
Prefer low dividend yield companies
 
Not all low-dividend companies can be outperformers because you need quality too. But look at some of the great wealth creators in the last 20 years such as HDFC Bank, Bharti Airtel, Eicher, TTK Prestige, Escorts, Infosys, TCS: these have all been companies with low dividend yields. These companies have been able to fruitfully invest their business surplus into expanding the business. Dividend is partial liquidation of the company, at least that is what we all learned from Berkshire Hathaway.
 
Stick to your circle of competence
 
It is not how well you know about the companies you own or how many scrips you own that matters. You need to focus on your circle of competence. If you understand the steel or banking industry closely, then try to create a portfolio using these sectors as the theme. There will be no shortage of opportunities to pick good stocks. Buffett never touched IT stocks for a very long time as he considered them outside his circle of competence. You may miss some opportunities, but that is good enough. You can best enhance your investment returns by sticking to your circle of competence.
 
Continuously ask if you need to hold what you are holding
 
Peter Lynch had a wonderful analogy for this point. He suggested that investors should constantly evaluate their existing holdings with the question, “Am I willing to commit fresh funds to the stock”? If the answer is a “No,” it is perhaps time to exit the stock. The moral of the story is that just as stocks need to be attractive enough for buying, they also need to be attractive for holding. Otherwise, you are better off letting go of that stock and reallocating that money to some other stock where you see better prospects. This keeps your portfolio robust.
 
Diversify and rebalance continuously
 
Portfolio concentration is great when you want to flaunt your multi-bagger picks to your college alumni. In reality, portfolio concentration is not a great idea. The best of investors tend to diversify their holdings because is as important to manage risk as it is to manage returns. At the end of the day, it is the risk-adjusted returns that really matter, which can be achieved by diversifying your risk to the extent possible. It is not just about diversifying but also about constantly rebalancing your portfolio on a continuous basis. You need to weed out the stocks that are going to be a drag on your portfolio and focus on the winners.
 
Plan your strategy and stick to it
 
You would be truly presumptuous to set off on your investment journey without a proper plan. You plan needs to take into account factors such as how to enter stocks, how to keep a stop loss, how to set triggers, and how to exit stocks. This is a very important part of the entire investing process because, in the absence of a plan, you are likely to manage your investments in a very random manner. You can avoid that by creating a long-term plan to create wealth and just sticking to it.

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