Success Mantra: A portfolio of 18 to 25 quality stocks bring optimum diversification Holding a portfolio of 18-25 quality stocks brings in the optimum diversification and reduces risk substantially.

In the global context, ‘Equity’ as an asset class has the distinction of outperforming other asset classes such as Fixed Income, Gold and Real Estate over the long term (greater than 10 years) on a risk-adjusted basis.

This outperformance stands out especially when we consider inflation and rolling returns across time periods. But, equity is a high-risk, and high-return asset class and a large number of stocks do not beat risk-free sovereign securities even over longer periods of time.

Hence, holding a portfolio of 18-25 quality stocks brings in the optimum diversification and reduces the risk substantially.

In the Indian context, equity long-term winners can be found across sectors like Consumer Staples, Consumer Discretionary, IT, Auto, BFSI and Retail.

Value investing is one of the many investment strategies that enable investors to create wealth over a longer time period by choosing the right winners.

It involves picking stocks whose market price seems to be below their intrinsic or fair value. Any market is made up of many buyers and sellers and asset prices are driven by demand and supply.

Humans are emotional and tend to over or under-react to the news. This at times leads to irrational exuberance taking the form of 'greed' when the news is good and 'fear' when it is bad, resulting in asset price movements that do not correspond to underlying long-term fundamentals.

This happens more during volatile/uncertain times and thus, offers sustainable 'arbitrage' opportunities to profit by buying/selling undervalued/overvalued assets relative to their intrinsic/fair value over medium to long-term.

In other words, this is also known as 'Margin of Safety' which limits the losses on the downside but increases profits on the upside.

Intrinsic value can be derived from doing a thorough analysis of a company’s financial statements as well as fundamental factors, including the company's brand, business model, target market, and competitive advantage.

Value investing is more of an art than science as it requires certain behavioural attributes such as contrarian thinking ability (not having herd mentality), diligence and patience to stick to investment philosophy (at times holding idle cash in search of value ideas), holding quality investments for long term (instead of running behind trendy companies) and not having FOMO (Fear-of-missing-out).

Warren Buffett is probably the best-known value investors today, who has beaten the S&P 500 index for decades, now for some time and has been underperforming in recent times.

However, he has continued with the time tested investment philosophy. This reinforces the adherence of the investment discipline in a consistent manner.

The author is Chief Investment Officer, Validus Wealth