Investing Is All About Looking Into The Future

In this ever-evolving landscape, the ability to predict and adapt becomes a catalyst for success. Mandar Wagh explains how a forward-looking mindset informed by comprehensive analysis and a diverse approach is the key to unleashing the potential of future investments 

Frequently, we find ourselves making investments in stocks, either drawn by their ongoing upward momentum or relying on forecasts of a surge driven by robust Quarterly Results or other favourable indicators. Yet, all too often, shortly after our investment, the stock takes an unexpected downturn. As a result, individuals are always concerned about where they may have erred in their financial decisions, leading to a feeling of nervousness. The primary factor at play is our tendency to make investment decisions relying solely on historical or present conditions, a practice that undoubtedly holds importance. 

However, it is essential to recognise that basing decisions only on these factors may not be appropriate for achieving sustainable long-term growth. Companies such as PB Fintech Ltd. (Policy Bazaar), on the other hand, exemplify a dynamic financial trajectory. While they might encounter periods of financial instability spanning one or more quarters due to diverse factors, their long-term performance trajectory demonstrates marked improvement. This company, for instance, has consistently enhanced both its revenue and profitability metrics with the progression of each quarter. Moreover, shares have rebounded substantially from considerable lows, indicating a resilient recovery. 

Market experts emphasise the importance of envisioning the situation 18 months ahead. They assert that the eventual price will be determined by that future perspective, rather than the current state. Undoubtedly, fundamental analysis plays a pivotal role in determining the intrinsic value of an asset, a paramount consideration when making investment decisions. The intrinsic value encapsulates the true worth of an investment, derived from an in-depth examination of the company’s financials, earnings potential and other relevant factors. Notably, this intrinsic value can significantly differ from the current market price of a given stock. 

Fundamental Analysis and EIC Framework 

Fundamental analysis can be executed through two distinct approaches including top-down and bottom-up approach. The EIC framework embodies the top-down method, wherein the investor sequentially examines the economy, industry, and ultimately, the specific company. When considering an investment in any given company, a foundational understanding of the host country’s economy becomes imperative. Vital macroeconomic indicators encompass economic stability, GDP growth, unemployment rates, income levels, inflation rates, etc. 

During the evaluation of an industry, meticulous attention must be paid to Porter’s five forces’ model that includes the negotiating power of suppliers, the bargaining power of consumers, the potential for substitute goods, the threat of new market entrants, and the competitive dynamics among existing players. Achieving a comprehensive grasp of the industry necessitates a PESTLE analysis. It is a strategic framework used to analyse and evaluate the external macro-environmental factors that can impact an organisation or industry. The acronym ‘PESTLE’ stands for political, economic, social, technological, legal and environmental factors. By considering these factors, companies can adapt their strategies, allocate resources, and make informed decisions that are better aligned with the prevailing external conditions. Let’s delve into the details of each factor. 

Political - This factor examines the influence of government policies and regulations, and potential political risks on the organisation. It includes factors like taxation policies, trade regulations, government stability and international relations. For example, government service privatisation has the potential to trigger substantial transformations within the business environment. It can affect the economic landscape by potentially introducing new players and competition into the market. It can impact pricing, supply and demand, and overall market dynamics. Additionally, privatisation can lead to changes in employment patterns as the workforce transitions from the public sector to private companies. 

Economic - Economic factors encompass the economic conditions, trends and indicators that can affect an organisation. This includes factors like economic growth, GDP growth, inflation, exchange rates, interest rates and overall economic stability. As a case in point, banks exhibited remarkable performance in the previous quarter, capitalising on higher interest rates that contributed to a stellar growth in their net interest margin. On the flip side, inflation exerted adverse effects on the lower end of the fast-moving consumer goods (FMCG) sector. Individuals with modest incomes curtailed their expenditures, channelling more of their resources toward fuel and essential commodities. 

Social - Social factors focus on societal and cultural aspects that can impact the organisation. Demographic changes, lifestyle changes, consumer behaviour, ethical and social responsibilities and attitudes toward social issues are examples of factors considered under this category. For instance, as individuals become increasingly health conscious in the face of rising health issues, there is a growing trend towards the consumption of healthful snack options, such as sugar-free products. This notable shift in lifestyle is proving advantageous for companies operating in the packaged food industry. 

Technological - Technological factors relate to advancements and innovations in technology that could influence the organisation’s operations, products or services. Technological factors exert substantial influence on every industry, manifesting both favourable and adverse effects. Innovations in pivotal domains such as cloud computing, artificial intelligence (AI), Internet of Things (IoT), automation, cyber security, block chain technology and robotics are driving the forefront of this transformative wave. 

Legal - Legal factors encompass the laws, rules and regulations and legal frameworks that affect the company’s activities. This can involve areas such as labour laws, intellectual property regulations, health and safety standards, and other legal obligations. As an illustration, shares of Delta Corp Ltd. experienced a sharp decline following a substantial revision in GST rates applicable to casinos by the government. Numerous companies find themselves impacted as the Securities and Exchange Board of India (SEBI) enforces stricter disclosure norms. Concurrently, reports regularly surface about companies being penalised by SEBI due to their involvement in financial frauds or misrepresentations. These regulatory actions underscore the imperative for stringent adherence to ethical and financial standards. 

Environmental - Environmental factors refer to ecological and environmental considerations that can impact the business. This might involve factors like sustainability, climate change, resource availability and environmental regulations. Sugar companies, for example, are benefiting from the government’s push for sustainable energy sources through the ethanol blend initiative, whereas chemical companies face significant challenges as rules tighten to protect the environment from chemical effluent outflow. 

Following an in-depth study of the industry, a meticulous analysis of the company itself is conducted, drawing on both qualitative and quantitative data. Quantitative analysis encompasses a detailed examination of financial statements and employs diverse analytical tools. Conversely, qualitative analysis delves into the company’s vision, organisational structure, management team, culture, values, corporate governance and competitive edge. 

Significance of Free Cash Flows

If you were to ask an investor about the financial variables that should be assessed while investing, the common responses would encompass a company’s financial performance, returns and valuation metrics, among other factors. Two such valuation measures that frequently come under an investor’s purview are the price-to-earnings (PE) and the price-to-book value (PB) ratios. While these ratios do offer insights into prevailing earnings’ potential, it’s essential to acknowledge that neither of these ratios offers a glimpse into future prospects. This is where the significance of free cash flow (FCF) becomes apparent. FCF serves as a pivotal parameter, encompassing a broader spectrum. It encapsulates a company’s earnings and accounts for depreciation, present capital expenditures, capital inflows and working capital investments. 

It refers to the residual cash with a company, once essential cash outflows necessary for operational upkeep and the maintenance of capital assets have been subtracted. FCF designates the portion of a company’s cash flow that can be allocated to creditors and investors without causing any impact on its ongoing operations. A company’s financial strength is reflected in its FCF. Greater FCF signifies enhanced financial health. This surplus cash is a direct resource for creating value, facilitating growth initiatives, expansion and providing rewards to stakeholders. Investors would be wise to pay close attention to companies that demonstrate a consistent ability to generate growth in their free cash flows.
 

Futuristic Approaches to Investing

It involves adopting innovative strategies and leveraging emerging trends to gain a competitive edge and capitalise on potential opportunities. Certainly, exploring various approaches to investing with a future-focused mindset can greatly enhance one’s chances of success. Here are some different approaches to consider:
 

◼ Fundamental Analysis - As discussed earlier, it involves studying a company’s financial health, management team, business model, industry trends and competitive positioning. By assessing these factors, investors can gauge the long-term growth potential of a stock. 

◼ Technical Analysis - This approach involves analysing price patterns, trading volumes and other market indicators to predict future price movements. Technical analysts believe that historical price and volume data can provide insights into future trends. 

◼ Value Investing - Value investors seek to identify stocks that are trading below their intrinsic value. They believe that over time the market will recognise and correct undervalued stocks, leading to potential profits. 

◼ Growth Investing - Growth investors focus on companies with strong potential for future earnings’ growth. They look for innovative companies in expanding markets, even if their current valuations seem high. 

◼ Contrarian Investing - Contrarian investors go against the prevailing market sentiment. They look for opportunities in stocks that are currently out of favour with the market, believing that prices will eventually rebound. 

◼ Long-Term Trend Investing - This involves identifying and capitalising on significant long-term trends, such as technological advancements, demographic shifts, or changing consumer behaviours.
 

Thematic Investing

Thematic investing is an investment strategy that involves building a portfolio around specific themes or trends that are expected to drive economic, social or technological changes in the future. Unlike traditional investment approaches that focus on sectors or asset classes, thematic investing centres on broader concepts or megatrends that could have a significant impact on various industries. Thematic investing themes may include artificial intelligence, robotics, cyber security, green energy, electric mobility, and so on. It can be implemented through individual stock selection, exchange-traded funds (ETFs) or mutual funds that focus on specific themes. It allows investors to align their portfolios with their beliefs, interests and expectations about the future while potentially benefiting from the growth opportunities associated with the emerging trends. 

Conclusion

In this ever-evolving environment, the ability to predict and adapt becomes a catalyst for success. A forward-looking mindset, informed by comprehensive analysis and a diversified approach, holds the key to unlocking the potential of futuristic investments. A futureoriented investment strategy requires an extensive understanding of industry and economic contexts, a thorough analysis of companies using both quantitative and qualitative measures, and an openness to harnessing innovative approaches that account for emerging trends. By adopting such a strategic outlook, investors can navigate the complexities of the financial landscape with greater confidence and potential for long-term growth.