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Takeaways from 2010 for equity investors

2010 was a significant year for equity investors given the market movements.


   When you look back at the equity market's performance in December 2010, you are bound to smile at the performance of your portfolio. The average returns of most equity funds have been in the range of 20-30 percent, with some clocking even a return of 40 percent. In the case of individual stocks, the performance has been staggering with many stocks clocking over 50 percent returns. Many from the technology space have been impressive and despite the recent correction, a number of mid-cap stocks have turned multi-baggers.


   While every year in recent times has been dominated by foreign institutional investor (FII) flows, the year 2010 truly belonged to this aggressive bunch who took the inflows into a different level in the months of September and October. For the first time in many years, the domestic stock market was on the radars of a number of global funds and the noise in support of allocation for domestic stocks got louder during the year. Even as sceptics are crying hoarse that this money supply could end soon in the light of pricing, the time seems to have come for the world to have a bigger pie of India. This in itself should be comforting for the domestic investor but you need to get the timing right.


   A popular joke about investing in equity is that it is easier to spend time in the market than timing it. The repeated bounce-backs witnessed in the markets after sharp corrections have only reiterated this well known principle. However, the performances of a number of sectors did not hold water in 2010 as many didn't show signs of bounce-back even after sharp cuts.


   The classic examples were real estate and construction stocks that came under severe pressure due to negative news flow. The pain was more in the case of many small and mid-sized companies which shed as much as 30-40 percent in a matter of a few trading sessions. As a result, a number of investors are bound to feel left-out of the year's rally despite the market in general adding close to 35-50 percent to its previous level. The best way to tackle the issue is to put the past behind and take the right step forward. The task would be a lot easier if one makes it a point to learn some lesions from previous experience.


Why not list out the takeaways from the year gone by and avoid committing those errors in the New Year?


Here are some takeaways from 2010:

A stock that sheds liberally need not be good to invest in    

Often, an investor rushes to buy a stock which is on a downward trend, but one needs to know the reason behind the falling spree. As the recent scams have exposed, stocks which rose on manipulation and on poor fundamentals can never regain their past glory as their prices were never fair.

Past performance is no cushion for future show    

It probably holds good for sectors which hog the limelight at regular intervals. Ironically, every year has thrown up new winners at regular intervals and investors always seem to catch on at the wrong time. If it was auto in 2008-09, it was real estate in 2010 as both sectors came up with stellar performances prior to their poor shows.


   While betting on a sector, one needs to analyse the macro environment and price points first. If auto was an underperformer in 2009 it was because of the interest environment and so was the case with property in 2010. Hence, rather than using the contrarian approach, an investor would be betterplaced if he picks stocks which are not challenged by the macro environment.

Buying it right and getting out smart    

Equity markets in general can be better performers when compared with other assets. They can churn out winners when an investor gets his timing right both with buys and sells. In a volatile market, both need to be managed well as they ensure optimisation of returns.

 

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