Five investor choices that matter now

Nifty 50 has been unusually range-bound and declined 2 per cent in the last two years compared with a 42 per cent return in the two years prior to this. It is quite clear that market dynamics are changing from the post-Covid years. During that phase, improving fundamentals were turbocharged by easy money and positive sentiment. However, in the last two years, support from liquidity and sentiment has been waning, reflected in flattish headline index performance with deeper pain in stocks. Close to half of Nifty-500 stocks doubled in 2022-24 compared to 18 per cent in 2024-26, and every sector gained earlier while it is not the same in the last two years (see charts). This means investing now requires a much more disciplined approach than was demanded post-Covid, when investors were rarely penalised for mistakes.

The bottom line: investing discipline is paramount in the emerging market regime. Investors should evaluate their goals, investing style, sector cyclicality, diversification and rebalancing method. Investors need to define a framework in advance and follow it with consistency.

One of the first distinctions investors must make is whether they are investing for a defined tactical return target or strategically for the long term. An investor may buy with the expectation of earning 20 per cent, 50 per cent or 100 per cent, anchor to a previous high price or stick to targets provided by the sell side. This should be backed by tangible foreseeable progress in the business or valuation, or by a strategic event that supports the thesis — a product launch, an improvement in asset quality, an M&A announcement or a corporate restructuring are some examples.

Strategic long-term investing, on the other hand, is the time-tested method of identifying a good business, capable management and a favourable sectoral opportunity, then allowing the investment thesis to play out over a durable period. Here, there is no specific price target; you hold until things change structurally. A case in point is IT, where AI is challenging the sector’s growth assumptions that were unchallenged even two years ago. Unlike target/event-based investing, investors continue holding the stock until the original thesis holds without paying much heed to the sudden rise or fall of the stock. Large notional profits and losses must be treated as alerts to evaluate the fundamental thesis and nothing else. This behaviour is one of the main attributes of generating wealth.

On the other hand, if you are a target/event-based investor, you need to be nimble. If the expected development is delayed, underwhelming or fully priced in, the expected return may not be realised. Target investing, therefore, demands monitoring and a clear exit plan.

Does principal protection matter more, or do extra returns matter more to you? In trying to arrive at an answer to this, you will be able to identify whether you are a value or growth investor.

Value investing is often confused with investing in low-growth, stable stocks. But in practice, value investors also chase growth but prefer paying a lower price for that growth — thereby building a margin of safety, something that Warren Buffett has termed as the three most important words in investing. Lower price refers to price paid for cash flow or its proxies (earnings, EBITDA, sales, book value) measured by PE, EV/EBITDA, price to sales or price to book value.

Value investing works only if mispricing opportunities arise or if the market does not fully appreciate the growth outlook. Public sector banks delivering better performance for investors over private banks is an example of the latter. Mispricing opportunities arise from an unanticipated change in leadership (Navin Fluorine in late 2023) or regulatory/legal issues (JSW Steel in late 2025 and recently Dr. Reddy’s with semaglutide). Value investors need to be patient to wait for such mispricing, even if it means waiting for a few years.

The primary red flag of value investing is that some stocks are valued lower because their growth potential is lower. An misunderstanding of business opportunities or misjudgement of growth prospects can make a justifiably low-valued stock appear to be a value pick. This can lead to underperformance despite low valuations persisting. For instance, Aurobindo trades at 25 times earnings compared with 38 times for Sun Pharma, as Aurobindo does not have the lucrative domestic franchise and is unlikely to close the valuation gap.

Growth investing is easy to identify but can have a punishing downside compared with value investing. A fast-growing company is bought at a high valuation in growth investing. This also presents the main double-edged risk. Both earnings growth and valuations take a similar direction, compounding the upside or downside. If you are a growth investor, your focus must be less on valuation and more on quarterly earnings beats, market share gains or operating metrics. You will have to take a pause if and when these factors disappoint.

Hospitals illustrate this. Despite trading at 40-50 times forward earnings, strong growth has supported stock performance. As the sector drives volume- and pricing-based growth with increasing insurance penetration, the theme should hold.

After the choice of style comes choice of sectors - a call on cyclicality. A counter-cyclical investor looks for strong companies in sectors that are out of favour. This can resemble value investing, but the emphasis is not on low valuations; it is based on sector recovery.