With the economy expected to grow at 7.5 -8%, there’s no reason why a long-term investor should not enter the market at every fall
THE continuous decline in stock prices over the last few months has adversely impacted corporates, insurance companies, financial services firms and mutual funds, amongst others. But these are players who, perhaps, have the wherewithal to withstand such declines. This may not, however, be true of the small investor — the individual investing modest sums for a house, daughter’s marriage, retirement and others.
Should then the small investors rush for the sidelines? Or should they view this as a buying opportunity and plough more money into the market? A none too distant survey by an international management school had majority of the experts surveyed saying an emphatic ‘neither’ to the question. This being the consensus, let us ponder on how we can insulate the retail investor. These are not nuggets of wisdom which has remained hidden so far. These are the time tested prescriptions.
1) AVOID EXTREMES — FEAR & GREED
August-September 2007 had been the investor’s delight due to the booming IIP numbers, 8.5% GDP expectations and the sub 5% inflation. The markets had reached a zenith on hope, and greed prevented investors from selling. The party poopers arrived in the form of a steep rise in crude prices, lingering and massive sub prime mess in the US financials and the recent spike in domestic inflation. With fear gripping the markets in the changed scenario of continuing volatility and short-term bearish outlook, investors should take a balanced view and refrain from extremes — greed (the reckless pursuit of short-term gains) and fear (a substantial reduction in risk taking).
2) AVOID TIMING THE MARKET
The volatility associated with the see-saw battle between bulls and bears is unlikely to declare the winner in the near term. Under such circumstances, long-term investors should avoid the temptation of timing the market by selling defensively at the top and buying at lower levels. Let us avoid hypocrisy. Even though everybody agrees on the futility of timing the markets, most of us still try to do it with dangerous consequences.
3) LOOK LONG-TERM
Investors with a long-term horizon should avoid getting despondent with the short term moves/ aberrations in the equity markets. The present volatility on low volumes seems to be a temporary phase and we expect the markets to improve, albeit after a few months, once the disturbing factors settle down. Investors should use this phase to fine-tune their portfolio and avoid taking short term trading calls. The current valuation provides them an excellent opportunity to selectively cherry-pick value stocks across sectors.
4) KEEP OFF WORST-HIT SECTORS
Investors should avoid getting emotionally attached to sectors which are expected to be laggards in the medium term, e.g. the rising crude prices are likely to hamper the profitability of the airline industry. Similarly, in the rising interest rate scenario, one would be well advised to temporarily avoid interest rate sensitive like auto and realty and should use every rally to lighten their commitments.
5) AVOID EXITING THE MARKETS
One should systematically build one’s portfolio by accumulating stocks at various falls across time instead of deploying the entire cash in one go. The same methodology should also be followed while booking profits. Investors have traditionally ended up buying near peaks and exiting near bottoms. A case in point is the TMT sector which was deserted by investors after the dotcom bubble burst in March 2000, only to find the sector rebounding in March 2003 when equities began to rally.
6) DON’T PUT ALL EGGS IN ONE BASKET
With the indexes swinging up and down, steady performers in solid sectors remain the best bet. But this isn’t to say that one should completely avoid mid-cap stocks and switch everything to large caps. One should keep in mind that mid-cap stocks should be a part of any balanced portfolio, regardless of the current economic picture. Their growth potential is simply too great to ignore. Amongst the mid caps stocks, one should look for stocks with high insider ownership, strong balance sheet, solid business model and a compelling valuation.
7) DE-RISK BY MIX
The current bearishness is likely to attract new-comers who had missed the previous bull run. One of the hardest things for them would be identify the right picks in the market mayhem. Hence, avoid direct exposure to equities and instead participate via good quality mutual fund schemes as equity investments are a full-time activity backed by research and analysis.
The ongoing global crisis and the domestic economic situation have made it difficult to take short-term call. We don’t foresee an adverse change in the fundamentals of the Indian economy and still believe that the economy is likely to maintain a stable growth rate of 7.5% upwards over the next three years. With the economy expected to grow at 7.5 -8%, we see no reason why a long-term investor should not enter the market at every fall.
THE continuous decline in stock prices over the last few months has adversely impacted corporates, insurance companies, financial services firms and mutual funds, amongst others. But these are players who, perhaps, have the wherewithal to withstand such declines. This may not, however, be true of the small investor — the individual investing modest sums for a house, daughter’s marriage, retirement and others.
Should then the small investors rush for the sidelines? Or should they view this as a buying opportunity and plough more money into the market? A none too distant survey by an international management school had majority of the experts surveyed saying an emphatic ‘neither’ to the question. This being the consensus, let us ponder on how we can insulate the retail investor. These are not nuggets of wisdom which has remained hidden so far. These are the time tested prescriptions.
1) AVOID EXTREMES — FEAR & GREED
August-September 2007 had been the investor’s delight due to the booming IIP numbers, 8.5% GDP expectations and the sub 5% inflation. The markets had reached a zenith on hope, and greed prevented investors from selling. The party poopers arrived in the form of a steep rise in crude prices, lingering and massive sub prime mess in the US financials and the recent spike in domestic inflation. With fear gripping the markets in the changed scenario of continuing volatility and short-term bearish outlook, investors should take a balanced view and refrain from extremes — greed (the reckless pursuit of short-term gains) and fear (a substantial reduction in risk taking).
2) AVOID TIMING THE MARKET
The volatility associated with the see-saw battle between bulls and bears is unlikely to declare the winner in the near term. Under such circumstances, long-term investors should avoid the temptation of timing the market by selling defensively at the top and buying at lower levels. Let us avoid hypocrisy. Even though everybody agrees on the futility of timing the markets, most of us still try to do it with dangerous consequences.
3) LOOK LONG-TERM
Investors with a long-term horizon should avoid getting despondent with the short term moves/ aberrations in the equity markets. The present volatility on low volumes seems to be a temporary phase and we expect the markets to improve, albeit after a few months, once the disturbing factors settle down. Investors should use this phase to fine-tune their portfolio and avoid taking short term trading calls. The current valuation provides them an excellent opportunity to selectively cherry-pick value stocks across sectors.
4) KEEP OFF WORST-HIT SECTORS
Investors should avoid getting emotionally attached to sectors which are expected to be laggards in the medium term, e.g. the rising crude prices are likely to hamper the profitability of the airline industry. Similarly, in the rising interest rate scenario, one would be well advised to temporarily avoid interest rate sensitive like auto and realty and should use every rally to lighten their commitments.
5) AVOID EXITING THE MARKETS
One should systematically build one’s portfolio by accumulating stocks at various falls across time instead of deploying the entire cash in one go. The same methodology should also be followed while booking profits. Investors have traditionally ended up buying near peaks and exiting near bottoms. A case in point is the TMT sector which was deserted by investors after the dotcom bubble burst in March 2000, only to find the sector rebounding in March 2003 when equities began to rally.
6) DON’T PUT ALL EGGS IN ONE BASKET
With the indexes swinging up and down, steady performers in solid sectors remain the best bet. But this isn’t to say that one should completely avoid mid-cap stocks and switch everything to large caps. One should keep in mind that mid-cap stocks should be a part of any balanced portfolio, regardless of the current economic picture. Their growth potential is simply too great to ignore. Amongst the mid caps stocks, one should look for stocks with high insider ownership, strong balance sheet, solid business model and a compelling valuation.
7) DE-RISK BY MIX
The current bearishness is likely to attract new-comers who had missed the previous bull run. One of the hardest things for them would be identify the right picks in the market mayhem. Hence, avoid direct exposure to equities and instead participate via good quality mutual fund schemes as equity investments are a full-time activity backed by research and analysis.
The ongoing global crisis and the domestic economic situation have made it difficult to take short-term call. We don’t foresee an adverse change in the fundamentals of the Indian economy and still believe that the economy is likely to maintain a stable growth rate of 7.5% upwards over the next three years. With the economy expected to grow at 7.5 -8%, we see no reason why a long-term investor should not enter the market at every fall.
