Why should you stick to investing in market leaders only?

Before investing in any stock a fundamental investor scrutinize various qualitative and quantitative parameters to take an informed decision. Selection of a stock for investing is a cumbersome task and requires blood and sweat before reaching to an optimal decision. An investor has to go through current and preceding years financial statements to understand the context. The concept of investing banks upon the investor’s brainstorming. An industry that seems promising because of changing government rules or taste and preferences of general public or both creates a first move advantage for the investor. After determining an investment theme investors prepare a list of companies that are operating in that industry. Usually, investors get struck with two ideas whether to invest in a small player that has the potential to turn into multi-bagger or to stick with market leaders having proven consistency.

There is no denying the fact that investors have made fortune by investing in little champs and have seen them grow multi-fold on the cost of investor’s anxiety and sleepless nights. While, investing in market leaders provides an edge to investors. In times when broader market gets correct, market leaders correct less and foremost get the interest of investors.

Must Read: ‘One size fits all’ doesn’t work anymore! Every sector has different parameter to scrutinize.

The changing investment style is claiming that ‘Big Companies Become Bigger’ and in order to support the statement we will discuss some parameters.

  • Bargaining power over suppliers: Market leaders have higher production and sales figure in comparison with small players. In order to augment high productivity companies require high amount of raw-materials. In times of inflation or less supply of inputs small players don’t get the raw-materials on time and at previous prices to match the ongoing demand. However, due to purchase of heavy quantity of inputs market leaders possess a bargaining power due to which suppliers provide them at similar prices or less increased rates on time. This does not affect the operating cycle of company and hence their equilibrium to meet the ongoing demand never gets interrupted.
  • Excess capacity to augment sudden rise in demand: Market leaders generally have more fixed assets in terms of plant & machinery and land for production. Due to high turnover and operating margins the market leaders increase their capacity over a period of time. This facilitates them to utilize their spare capacity in times when aggregate demand increases suddenly. Availability of excess capacity helps them to grab the opportunity arise and make healthy bucks on them.
  • Easy access to cheaper funds: As market leaders possess longer learning curve, high production numbers and sales volume it is effortless for them to fetch funds at cheaper interest rate from corporate lenders. Corporate raise funds for expansion, new ventures, capitalization on equity and to redeem current debt on maturity. Access to finance at cheaper rates helps them to attain higher Net Present Value. It also helps them to improve their working capital requirements and operating margins.
  • Higher Fund inflows from institutional investors: Domestic and global institutional investors have market players on their prior preference of investing. Investment banks prefer to stick with market leaders due to high reliability, less volatility and consistent performance. Fund houses infuse tremendous liquidity in market leaders for a safer bet, compounded return and consistent dividends.

Investing has become a critical phenomenon due to rising dependency on global markets, involvement of various asset classes and quick flow of headlines. Various institutional investors face these hurdles to determine an optimal investment strategy. For retail investors, safeguard of capital is the foremost priority in comparison with making handsome returns. Therefore, retail investors should stick to investing in market leaders only.

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