A defensive investor is someone who has the grit to stay in the market for a relatively long time, be patient, and expect a modest return approximately equal to market. A defensive may not be able to spend a large part of his time analyzing securities, annual reports, quarterly reports using different tools to analyze financials of a company. He can be a retired pensioner looking to secure the future of his children, he can be a government employee, he can be someone looking for an early retirement, etc.
He is definitely not the enterprising investor who looks to beat the market every single year. Neither is he the SPECULATOR (I like to call the day trader as a speculator and not as an investor).
So the strategies for a defensive investor when selecting the stocks for a company can be summarized in a few points for quick reading:
1.Adequate size of the enterprise: Avoid small caps as the risk is higher than what a defensive investor would prefer
2.A sufficiently strong financial condition: This can be obtained from annual reports and financial statements
3. Earnings stability
4.Dividend record: Uninterrupted dividend payment for the past one or two decades
5. Earnings growth: Look for companies that improves its financial condition YoY
6. Moderate P/E ratio of not more that 15
7. Moderate ratio of price to assets: Make sure the current price is not more than 1.5 times the book value for the last FY
P.S: Today the defensive investor has the best possible option available to him in the form of hundreds and thousands of mutual funds. Just be good enough to zero in on the mutual fund likely to match your end goals.
Some of the points here can be challenged, Praveen
For example - Take a look at Bosch Limited. It has been one of the greatest wealth creators in the Indian market netting in excess of 30% CAGR over the last decade. This stock has never traded below 20-25X in terms of PE…and this company is rock steady.
Would this not qualify as a buy for a defensive investor?
Hi Karthik,
It is a given that if the fundamentals look strong and the share satisfies at least 75% of the criteria above, you can go for it. I did not mean that you should stick to all the criteria. But here we are talking about the DEFENSIVE INVESTOR and not about the aggressive investor. Think about what you would have said about Bosch stock in 2003 for instance. How many could have predicted the rapid growth.
It is easy for us to find shares which have beaten the market when we have years of data at the tip of our finger.
But what we are talking about is the unpredictable. Can you suggest of a share that is trading at a P/E of 30-40 and which you believe will grow at a CAGR of 30% for the next 20 years? Its almost impossible even for Warren Buffett. That is why we stick to some criteria and in that way we can at least follow Mr.Market.
P.S: If you mine the past 20 years data, I am sure you can find more companies like BOSCH. But the thing here is whether you can do it for the future.
Why risk your future!
Understanding the fundamentals of the sector is most important. Investing is for future not based on past performance.
You have to see what steam is still left. institutional investors look for Delta in growth ( growth of growth rate ) if that is not favorable then they start exiting it.
And for BOSCH it’s time has come now. Govt push to Electric vehicles is Negative for it. Battery companies. Forging companies etc will face the problem. This stock has reached peak. Amararaja also reached peak. Unless they come up with new ideas that will not go again to that peak.
Coal India is also going into that stage. It is going up mysteriously. World wide coal is being phased out. But ADANI is investing huge in Australia. My friends in Australia say he will loose everything in Australia.
So at first stage identify the Best Sectors.
Then select best stock within that Sector. Following Financials alone not sufficient.
As you said if anyone don’t have that much knowledge of fundamentals then leave it to experts in Mutual Funds.
I would like to discuss one stock here. IndiGo Airlines. I have been investing in this company for the past one year. I buy 3-4 shares every 15 days. I attend their conference calls every quarter. Check the news on google every 3-4 days and also have read their annual reports.
I am also sitting on a profit of nearly 39K (excluding 5K dividend) as you can see in the screenshot. I plan to hold it for another 5 years. I believe that airline industry in India has a lot to go. A large population have not flown in an aircraft (myself included) which would someday want to fly. Also, the middle class is expanding which is also good.
I think that Air India divestment program and recent regional operations started by the airline is also going to fare Good for it. If IndiGo gets Air India’s international operations it would be extremely good news. I think the share will move up very quickly.
I wanted to know the opinions of you all respected members. What do you think of IndiGo and should I continue to hold it? Please let me know.
Hey @ankuragr Congratulations for your Profits.
I would say be Invested in this stock.
Your views for long term Investment looks good.
Stock looks good on Chart.
From Last 1 month Everyday it has made a New high.
At Present Delivery % in stock is 65.21% and Increasing from Previous Trading sessions.
Mutual funds also holding this stock.
All data looking good for a long term Investment.
I will suggest you to book partial Profits whenever the Stock hit new high. Becasue you have Invested all funds in single share.
You never know Any bad news in airlines can effect your profit afterall this market runs on policies & Sentiments. Or any Good news or policy can Double your Investment.
Thank you for the positive outlook. I am planning to hold it for a long term because I think that Indian Aviation market is highly under-penetrated. On the top of, if Air India deal finalises, and Indigo gets its international operations which is very likely, the stock would go through roof.
I see many positive cards in the upcoming future for IndiGo. I think this company should be given at least 7-10 years before selling it. By that time this stock could be a 10 bagger. Let’s see.
