RACING AHEAD: ARE AUTO STOCKS STILL A BUY?

India's auto sector is displaying all the signs of a classic bull market. But there are risks

- Abhishek Mukherjee

File photo of Maruti Suzuki cars parked at the company's plant in Manesar, Haryana. India's largest carmaker received 80,000 enquiries on 22 September, the first day of the 'GST 2.0' regime.

(REUTERS)

If the upheaval around H-1B visas and hand-wringing over the fate of India's IT majors has underlined anything from an investing standpoint, it is this-sectoral tailwinds matter.

You can be a champion swimmer, but if the currents are flowing hard against you, it is the ocean and not your skill which will decide your fate. If an industry faces regulatory hostility, operational disruption or other major headwinds, even the most well-run company cannot prevent share prices from cratering.

Benjamin Graham, the original guru of value investing, once remarked that the art of investment was often believed to lie "first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries."

Warren Buffett made the same point, but in reverse. When a management of great brilliance meets an industry of bad economics, it is the industry's reputation that remains intact. In other words, investing without accounting for sectoral forces is like sailing with no regard for the weather, thinking that your skilled captain and sturdy boat are enough to bring you to the shore.

This is the reason why many market veterans have a simple rule-of-thumb for stock picking-a mediocre company in a strong sector is preferable to a stellar company in a weak industry.

Sectoral tailwinds, be it in the form of favourable demand, supportive regulation, supportive unit economics or a combination of the above, are among the most powerful forces in the market. They raise the baseline of returns for the entire segment, and handsomely reward the top performers.

And right now, there's one sector where the wind is firmly at investors' backs.