What are the investment lessons after the Adani debacle?

February 5, 2023

As the Adani saga continues to unfold, we need to see the lessons for the common investors.

Here are the few I have compiled-

1) It’s better to miss the bus than catch the accident-prone bus- Adani stocks have generated a huge return in the last 2-3 years. It was in the range of 500-2000% over this period. Many investors thought they were missing the rally and bought the stocks. But was missing the bus that bad? The rest of the market has been generating a reasonable return so what was the need to take that extra risk? Choosing the investments based on recent past performance is one of the worst ways of investing. That greed may cost one very dearly.

2) If something looks too good to be true it often is- Infrastructure sector companies grow quite slowly. Adani companies are in this sector. How come Adani stocks have delivered such staggering returns when other infra companies are progressing at much slower rate? Unreasonably high returns must cause an alarm bell and one should be cautious with such mouth-watering returns.

3) Take PE ratio more seriously- In the recent past, many investment experts have stopped giving attention to PE ratios and rather focused on things like growth story, new age technology and other such vague things. Look at the peak PE ratio of couple of Adani stocks-

Adani Enterprises- 343

Adani Green- 771

Other stocks were also substantially higher than the other similar companies in that sector. PE is a very effective indicator of relative valuation of that stock. Generally, infrastructure companies have the PE ratio in the range of 12-18. So, Adani stocks on the prima facie itself looked highly overvalued.

4) Understand the company else invests through mutual funds- Investing in stocks is highly risky simply because people invest for the wrong reason. Often investing just because that stock is going up is the worst form of investment. You have to not only understand the company and its risk factors but also establish whether you are paying the right price for those stocks. If you don’t have the time and requisite skill set to do so, better to stick with mutual funds.

5) Diversify your portfolio- Every now and then the wisdom of not putting all your eggs in one basket is coming to the fore. If you have little exposure in Adani stocks, their rout is not likely to wipe out your portfolio just maybe put a small recoverable dent.

That’s where investment in good mutual funds plays a vital role. They may shake a little but are not likely to collapse. Whereas a few wrong choices in stocks will put your financial goals in jeopardy.

6) Peace of Mind- This is more important than money. You have to earn a good return in order to achieve your financial goals but not at the cost of your peace and sleep. A simple market-oriented return is much better than chasing too hot to handle return. You probably are better off avoiding avenues like bitcoin and hot stocks and sticking with risk controlled mutual funds.

We still don’t know who is telling the truth, the Adani group or Hindenburg report. That is the job of the investigating and regulatory agencies of India to put a transparent picture before the Indian public. And they must do it fast to restore the confidence of the investors and public. But whatever happened so far is a great lesson for the common investors. Unfortunately for many, the stock market keeps providing virtually the same lessons, still they console themselves that this time it’s different and keep chasing the hot return. Will this episode be any different? Hopefully for a few if not for all.

Manoj Pandey