Go for the kill...

 

 

October 27, 2008, the Bombay Stock Exchange benchmark index – Sensex was at a multi-year low of 8,509. On that day when Delhi-based Sahadev – who has been a keen follower of the market and an avid investor – was asked about his investment plans, he answered, “Are you crazy? The market is going through a real bad phase and if you don’t want to burn your money, just sit quiet. Wait till the bulls return to the market.” Today, the market is again on an upswing and the Sensex has climbed over 3,000 points in less than 50 trading sessions between July 14 and September 18 to come close to 17,000 from 13,800. This rally has given Sahadev enough confidence to return to the market. And he is not alone. Millions of retail investors who kept themselves away from the market after losing billions in the market mayhem of 2008 are now returning with renewed expectations. Probably, they all think the way Sahadev thinks. But the question remains, is it actually the right time to invest? Well, as some market man had once said, there is no right or wrong time to enter the market. It’s all about how and where you park your money!

Traditionally, it has been a fact that steep fall in indices and volatility at the market place has seen a sharp fall in Indian households’ investment in shares, debentures and mutual funds (all scheme categories) as percentage of total financial savings. On the other hand, whenever the stock market is at a boom, they were happy to put more money, allocating a larger part of their savings. And the case this time is no different. Perhaps that is why Indian households invested only 2.6% of their savings during the financial year 2008-09 as compared to 12.4% for the financial year ended on March 31, 2008. Moreover, investors, who pumped in Rs.56,799 crore in mutual funds in FY08, pulled out Rs.10,478 crore from these in FY09, exactly opposite to the golden rule that suggests buy low, sell high (on an average market was high in FY08 as compared to FY09). And the result, well, we all know it, losses, losses and more losses.

But then it’s not the investors who are to be blamed. Average retail investors hardly have the deep knowledge to decipher the complex web of financial markets. So, most of them are guided by just the price movements. A price movement in an uptrend or a downtrend is their only signal to buy or sell. They believe, the stocks that have gone up recently (especially those with a lot of media hype and recommendations by market commentators) are the best possible opportunities available. But what they miss is, if the share is making a lot of noise that actually means that it’s already on a high. It’s possible that the stock may still surge further, but in most cases when an investor buys such a hyped up stock it only means that he is entering at a higher level. This could either result into lesser profit or just losses. Ashok Jainani, Vice President – Research & Market Strategy, Khandwala Securities avers, “Average investors are ‘tipped’, or rather we say trapped, into buying or selling when the entire trending move is about to end. Thus, they end up buying high and selling low in the continuous process of wealth concentration.” He further adds, “It is easy to follow the ‘anchors’ (of various market related talk shows where analysts suggest their stock picks) and see your hard-earned savings disappear. To make money in the stock market, you need to be a lot more serious than merely following a guy standing next to you on the roulette table.” The situation today is nothing different. It’s true that economists can see the green shoots of recovery. But certainly they are not as strong as the market is proposing at the moment. Going by fundamentals, India’s growth GDP is still expected at just 7 to 7.5%. Other economic indicators too have not recovered completely from the global meltdown. Even global cues are still on the lower side. All these mean that the fundamentals are yet to recover and the market movement that we see at the moment is more of hype than anything else. Under these circumstances (especially with the media bombardment of news that talks of huge returns made by various investors), no doubt it’s easy for anyone, who does not have a deep knowledge, to get carried away. But the truth is, that’s exactly what the retail investors must refrain themselves from at the moment.

Moreover, it is time for retail investors to understand the difference between a ‘bad investment in a good market’ and a ‘good investment in a bad market’. While the first one ruins the investors irrespective of all situations, the latter pays even at the worst of the situations. But unfortunately retail investors, most of the times, fall for the first type. The reasons are many, it could be the fact that some big guy in the market invests in it. And another reason, the fact that the investor feels or gets tipped that the share is low priced and with a forward movement it can garner higher percentage gain for the investor. But Ashok Jainani warns such shares can be devastating for the financial health of the investors. He avers, “You need to know a lot more about the company (you are intending to invest in), seasonality in its business, the price behaviour and be able to anticipate major market shifts. Share prices constantly fluctuate as buyers and sellers haggle on a mutually agreeable price. Their fundamental worth however does not change minute-by-minute.” Thus his advice to the retail investors, who are keen to get going in the market at this moment, is to analyse the fundamentals of the company and the intrinsic value of the stock before investing in a particular stock. Investing just by being swayed by the market and media buzzes will certainly do no good to the investors.

A similar view is also expressed by Jagannadham Thunuguntla, CEO and Equity Head of SMC Capital, who is bullish on the fact that eventually the market will go up. Warning the investors that a quick money making approach may land them at a hopeless situation he adds; “Only those investors who adopt a patience approach (investing for a medium to long term horizon) will be able to make exemplary profits. Instead of jumping in to anything and everything that comes their way, investors have to be selective. Moreover, they need to pick only those stocks that have a reasonable valuation and strong fundamentals.”

It’s not possible for even the smartest of the investors to measure the exact high and low. So forget about it, as it’s nothing more than a bookish philosophy. But least an investor should do is investing a little sensibly and carefully. More so for the fact that it’s his hard earned money and he is investing it in the market to take back something, not to give something. Meanwhile, the market is again at a junction where investors need to be careful. Further they must understand that there is no fixed formula to win at the market place. So those who offer you top ten tips and twenty tricks of sure success in the stock market, ask them to keep their mouth shut and just follow the stocks with strong fundamentals.