Hello friends – welcome to another informative podcast by Angel One.
Covid 19 has had diametrically different effects on various pools of stock market investors. Some are scared out of their wits and want to pull out all their money and stuff it into a mattress while others want to milk the crisis by buying at rock-bottom rates with the hope of benefitting when stock prices turn around – as they believe will most certainly happen in some time.
Now every expert worth his salt and every investor, big or small, experienced or inexperienced will have a different approach … as we have discussed in most of our podcasts. However if there is one thing that everyone seems to be agreeing on at the moment – besides the importance of wearing a mask - it is that one should invest for the long term. For instance there is tremendous hype around investing in video conferencing platforms and in pharma companies involved in developing Covid 19 vaccines or testing kits. But the problem with these seemingly exciting opportunities is that their profitability is hinged on several unanswered questions such as: how long will the world stay in lockdown? Will Work-From-Home become a trend once countries start easing the lockdown? Which company will actually end up coming up with a vaccine? In other words they look good in the short term but the long term view is … let’s call it cloudy.
Experts recommend that in order to mitigate risks, investors adopt a long term strategy and a long term view to selecting their investments. There is definitely advocacy for long term secular stocks and while there’s no way to completely eliminate risks when playing the stock market, investors seem to concur that this is the safer of the two options. It’s like riding a scooter at rush hour. Wearing a helmet may not prevent an accident and may not protect you from fracturing a limb, but at least you are less likely to suffer a head injury.
So what are these long-term secular stocks and what’s making them popular right now? Long term secular stocks are basically the kind that is not affected by short term factors. Price increases are slow and gradual – investors need to hold on to these stocks for a long period. In most cases the stock prices increase in the long term, delivering profits to the patient. Patience is a virtue that pays, friends. Well… most of the time… no guarantees on the stock market, remember?
Now that we’ve made introductions, let’s get to know these popular guys a little better. What’s making them so popular? What’s their claim to fame?
· Long term secular stocks are not usually affected by the economy
These stocks are linked to companies whose products are always in use. So long as us humans are around and kicking, there will be demand for these products. Examples of such products are food, beverages, soap, toothpaste, electricity and mobile network. As a result companies involved in F&B, toiletries and telecom are very unlikely to experience the drastic negative effects of a crisis like Covid 19. These are the very products that are termed as essential. Proof of the pudding, you ask? Well… despite the seriousness of the lockdown, grocery shops remained open, did they not? And you still had internet and phone connectivity? There you have it then.
· Investors are making a valuable contribution to keeping essentials available
It feels good in these saddening times to invest in the right place and towards something that everyone needs – that is tangibly necessary and required at the moment.
· Portfolio diversification
Under normal circumstances, all of us veer towards stocks that are more volatile and therefore more likely to yield profits at a quicker rate. This is the time of instant everything and the same goes for investments. This is a good time to diversify ones portfolio and to include a different type of stocks (or at least stocks that behave differently) in one’s collection.
So how do you go about spotting long term secular stocks in the mix? There are actually 4 big signs that make them stand out in a crowd.
1. Long term secular stocks are linked to companies that are very often household brands, linked to items that are deemed necessary all the time by the general public. This includes companies that produce rice, salt, milk, spices, bottled drinking water and other beverages that enjoy sustained demand and also medicines – the kind that are used all the time, not the pandemic-specific kind.
2. It is often the case that secular stocks are lined to companies that have been around for a long, long time.
3. Long term secular stocks are very seldom linked to companies that are the next big thing or the latest trend. It is rare for the world’s biggest talking point to be linked to a long term secular stock.
4. If you look at the stock price graphs of these companies you will most often notice that the growth curve is gradual and sustained – there is a markedly lower amount of volatility.
Well now that we’ve covered introductions, benefits and key traits of long term secular stocks, it is time to discuss the roadblocks that you’re almost certainly going to face when you mention that you plan to invest. Here are the most commonly quoted doubts from the doubt-mongers and what you need to consider before swallowing their doubts without a second thought.
The prize has to go to: “Sell it all; sell it aaallll! You need hard cash right now.”
Well, if you have a stable job, savings and regular income, this might not be necessary or relevant to you. Then of course, there is “Now is not the time to buy. Sell whatever you have at any rate and get out because companies are going bankrupt shutting down.”
No argument with the generic notion that companies are shutting down but this is precisely why you need to choose correctly and choose long term secular stocks. Let me illustrate with a few simple examples – have you stopped eating altogether due to Covid 19? Have you stopped putting spices and salt into your food? Stopped brushing your teeth? Stopped bathing? Stopped using your phone? Or your computer? Stopped streaming shows or music?
Similar to example number 2 is example number 3, that is “Companies are so broke they are having to fire all their staff – look at Uber and Zomato!”
Again, no denying that this is absolutely true but it only underscores the necessity to choose where one invests correctly. Avoid investing in the next big trend and stick to what is considered essential.
To sum up, let’s close today’s podcast with one simple mantra – invest where possible, but invest carefully and selectively. Specifically look for companies whose products were necessary before Covid 19, continue to be popular despite Covid 19 and will continue to enjoy demand with or without Covid 19 in the future. Stay safe and happy investing!