Wise moves in today’s market8 min read . Updated: 04 Nov 2008, 11:07 PM IST
Wise moves in today’s market
Inflation is above 11%. Interest rates are rising. Individuals with home loans are struggling to cope with the higher equated monthly instalments (EMIs) and simultaneously deal with inflation.
In the stock market, the bulls are constrained by concerns over the macroeconomic scenario domestically, the grim global scenario, persistent foreign institutional Investor (FII) outflows and the possibility of another round of monetary tightening. That does not mean the bears have a free hand. The correction in commodities, especially crude, provides ample ammunition for the bulls to conduct a short-term rally.
Investors who flocked to gold as the “safe asset" were disappointed at the way the price dropped in August. Real estate rates, too, have dropped and by all indications will continue to fall. No asset seems to be a safe haven anymore.
The only asset that beckons is debt, with interest rates rising. But would it make sense for an investor to move into debt? While this is a good time to reassess one’s portfolio, it would not be wise to simply rush to income funds, fixed maturity plans (FMPs) or fixed deposits.
Read on to figure out how to make the best of such a bleak market environment.
Don’t let market conditions determine your asset allocation
For most investors, it is often the bull or bear run that determines their preference for a particular asset. During a bull run, everybody flocks to equities, and when the market crashes, uncertainty and fear paralyse everybody. This is ironical
Right now, when stocks are getting whipsawed and interest rates appear seductive, the instinctive reaction is to run to a safer haven. But abandoning equities now and moving to debt and cash would be a mistake. Those who under-invest in stocks would be left flat-footed once the market recovers. And equities, as an asset, must have a place in your portfolio. This, irrespective of the state of the market. In fact, if your equity holdings have been beaten down substantially, you could make some refinements to your portfolio. Check to see by how much your portfolio has deviated from your predetermined allocation. If your equity allocation has fallen substantially, you should focus on increasing it. Stay focused on your strategy. Not on the market.
Now is a good time to consider equity
You can learn a lot from the renowned investor, late Sir John Templeton. His investing mantra was simple: Buy at the point of maximum pessimism. In other words, as an investor, he relished adversity. Around 10 years ago, when Asian economies suffered a massive financial crisis, Templeton bet on South Korea, the worst hit. His investment is said to have netted him gains of more than 260% in the next two years.
A typical buy-and-hold investor, Templeton identified stocks that were trading below what he estimated to be their actual worth. He then was prepared to wait till the market recognized the value of the stock and the price corrected.
However, in reality, it is always the opposite. As the market peaks, almost anything is touted as a “can’t miss" investment or fund. Consequently, traditional measures of an asset’s worth go by the wayside. And investors run in droves to the market.
They buy for no other reason than the belief that the investment would go up in such circumstances. When the market tumbles, as it did this year, investors run to debt or hold cash.
The late Shelby Cullom Davis, a New York investment banker, former US ambassador to Switzerland and well-known value investor, once said, “You make most of your money during a bear market; you just don’t realize it at the time." Wise words for an investor to keep in mind!
Not every beaten down stock or sector is worth buying
In the phenomenal bull run in the past few years, risk has almost been an afterthought as investors plunged headlong into growth stocks and took heavy
But of course, that does not mean there aren’t any great stocks in smaller market caps. What this means is that nothing will substitute smart, bottom-up stock selection. For instance, among the worst performers in today’s market are banking stocks. But Dhanalakshmi Bank is currently viewed as a good bet. Its quarterly performance was impressive and neither was it punished too hard when its peers got hammered.
It is the same for sectors such as banking, real estate and construction. But that does not mean you should run away from them. Neither does it indicate that you should mindlessly shop for stocks in these sectors. But if you find good undervalued picks, go ahead and buy them.
If you have not done your homework on investing in a stock, however, you should not be investing in it.
And, don’t just dump your fund if it has performed miserably. Check its performance regularly with its peers. You would do well to keep track of the portfolio.
Don’t try to time the market
With the markets in such an extreme state of flux, it is very difficult to predict when a bull run will peak. By the same measure, it is also impossible to call the bottom. All bull and bear markets will exhibit periods that look like reversals, but are just momentary before the bull or bear regains control.
There are three things you should be absolutely clear about. The first is that you do not know when it is “safe" to get into equity. No one knows or predict that. No one knows when the bull run is ready to resume its pace. The second is the wrong assumption that it is alright to change your asset allocation guidelines as and when it pleases you, with no regard to a change in your personal situation but with sole reference to the market situation.
The third is that your gut-level feel about the end being near is a good recipe for disastrous investment decisions.
If you have been investing via a systematic investment plan (SIP), please continue the practice. There is no reason why you should stop. And, if you have not been investing via a SIP, please start.
Don’t try to invest lumpsums when you think the market is at a low. The same goes for timing the cycles of other assets. When equities are down, investors tend to find solace in what’s perceived as “safer" — recently, that was gold.
When the prices fell recently, they were a dismayed lot. If you do not have a valid reason for investing in a particular investment or asset, stay away.
You will be rewarded for staying cool
It’s not easy to step back for perspective when you are gasping for air as your portfolio value plummets. But any sensible long-term investor will tell you that bear markets are setting up the next bull market. They are also keenly aware that bull
While the old “buy and hold" mantra may seem like cold comfort in times such as these, rest assured that it has a better long-term record than market-timing.
The problem is when you let your emotions get the better of objectivity. Financial planner Gaurav Mashruwal says that there are three predominant emotions that rule the market: Fear, greed and panic. For instance, in 2002, investors were afraid to enter the stock market. The past collapse was too fresh in their minds. Around 2005, the masses began to enter the stock market. Soon greed took over and they began allocating huge sums of their portfolio to stocks. When the market crashed, there was panic. Once again, we reiterate that now is a good time to get into equity and you will be rewarded if you have a time frame of at least three years. So, the problem is not with the asset class but with the approach to equities and your investing strategy.
This too shall pass
Remember that bargain valuations are available only in these days of plummeting equities, high inflation and interest rates and a global slowdown. But the key is to understand whether “such" times are temporary or long-lasting.
Over time, all issues will be resolved. As long as the fundamentals remain strong, we have nothing to fear. If the fundamentals deteriorate significantly, the reverse will be true.
The structure of the economy, the strong corporate balance sheet, increasing household income without too much debt on their books, rising consumption levels and high savings rate will ensure that the slowdown in India is not severe. Equities have fallen before and they will fall again.
The last bull run ended in March 2000. The three-year bear market that followed was pushed by the tragedy of 9/11 and a recession. Finally, the market bottomed out in October 2002. From then on, it scaled impressive heights. Along the way, there have been some significant dips, followed by a continuation of upward pressure.
But in the end, companies with good fundamentals will weather the storms that sweep the market and the economy. The lesson here is straightforward.
Stocks are excellent long-term investments, but dangerous short-term bets.
*Figures provided by HDFC Mutual Fund in a note sent out by Prashant Jain
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