How to buy stocks in a bear market? Nilesh Shah on the art of investing

NEW DELHI: While many investors are busy studying price charts to decode Nifty's wild swings, calculating valuation ratios on lengthy excel sheets, and using algorithms to make buy and call decisions, Dalal Street’s top fund manager Nilesh Shah, who runs Kotak Mahindra Mutual Fund, says investing is an art and not a science.

“It’s an art and not a science. I may believe that company X is available at a 30 per cent discount to fair value and someone else may believe that it is trading at a 0 per cent premium to fair value. If both of us have the same opinion, then how will that trade happen? The stock market is a place where the seller thinks that he is making money by selling and the buyer thinks that he is making money by buying. Only then transactions will happen,” Shah told ETMarkets in an interview.

Urging investors to think of this bear market as an opportunity to make more money, the fund manager said the most exciting thing in a bear market is to be able to pick stocks at much below their fair value. “If there was no bear market, investor return would have been far far lower,” he remarks.

While headline index Nifty has confidently resisted slipping below the 15,000 mark and is now eyeing to reclaim Mt 16K, most indices are near their 52-week lows and several bluechips lying untouched in bear grips. So how should one go about picking stocks at this stage?

“Irrespective of the kind of market we are in, as long as you buy stocks which are representing good businesses where the return on capital is more than cost of capital, run by good managers who won’t cheat you or take you for a ride, and are available at good valuations and where there is a good margin of safety, by and large, that becomes a good stock pick.”

If Nifty hits 16,000, it would be trading at a PE multiple of 19 times forward earnings post the windfall tax on oil companies imposed last week. “It looks a little above fair value but nearer to fair value compared to October 2021. This is the market where you will be equal weight to equity allocations based on your risk profile, time horizon and objective,” said Shah, MD and CEO of Kotak AMC.

However, if Nifty ends 2022 at 16,000 it could be treated as time correction as the index would have become cheaper because earnings would have gone up. “There could be price correction as well. If 16,000 Nifty becomes 15,000, then there is a price correction. It could be both - time and price correction. So in the correction phase, keep increasing your allocation to equity,” is his advice to investors.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)