The retail investor syndrome could burn your fingers; a long-term strategy could protect you
THE BENCHMARK BSE Sensex marched ahead of the 13,000-point mark last week, creating a reason for investors who stayed invested in the market to celebrate. But for those who missed the bus, it left a feeling of déjà vu. It reminded them of missing the bus once again the way they did when the Sensex was between 8,000 and 10,000 points, and later just before the July-September (Q2) results.
On both occasions they thought that the market was overheated and/or it was in for a major correction. The market thought otherwise. Just before Q2 results, a correction of at least 1,000-points was expected, and the investors were anxiously awaiting it before taking the plunge. However, they were let down by the healthy economy and industry growth figures that poured in.
Those who missed the bus are keeping their fingers crossed. The thought flitting across their minds is whether to now or not? The nightmare of May-June 2006 still haunts them. Hence, this is the time for investors to take stock of the equity market in order to evolve enduring strategies.Prime movers Foreign institutional investors are the prime movers of the market today. Even domestic institu tional investors like mutual funds have not participated in the rally, let alone the retail investor. FIIs have pumped in over Rs 18,000 crore ($4 billion) since the rally took its roots on June 14, 2006. In line with their thinking, they confined their investments to frontline stocks (mostly A-Group). FII enthusiasm was backed by higher availability of funds in international markets. But this could undergo a change.
Then, what is driving the psyche of the FIIs? Narayan Ramachandran, CEO, Morgan Stanley Investment Management India Ltd, says it is the cash flow growth (business growth and profitability) that has at tracted them, as they were not overtly concerned about valua tions at this moment.
S Mukherji, Managing Director and CEO of ICICI-Se curities, puts it simply: “India will continue to attract FII investments as long as the corporate performance is good.” Valuations If one has to go by the price earnings multiple (P/E), the market is no longer cheap. The Sensex was ruling at a P/E ratio of 24.02 on Friday last, while its broad-based counterpart BSE-500 had it at 22.51. Even the 271-stock BSE Midcap Index was, in fact, leading the Sensex at 24.71 per cent, according to Bloomberg data.
The P/E for the whole market is inching closer to 16 times (based on the trailing 15months earnings, instead of 12 months), which is billed as the optimum level. The threat increases as the P/E ratio gets closer to its 10-year peak of 21 times.
This brings India’s standing vis-à-vis other emerging markets into focus. On the attractiveness of India among emerging markets, Ramachandran added: “Our focus is on BRIC (Brazil, Russia, India and China) countries, and South Africa. But we see Brazil, Russia and Maxico more attractive in the longer term.” RI syndrome Retail investors, who take up stock market investments as a secondary occupation, should guard against greed and fear, the two factors that exert immense influence on them. They suffer from what is called ‘retail investor syndrome’. They wait until a visible signal about the market direction emerges before taking the plunge. Institutional investors sense this much ahead through research and take positions. By the time the rally peaks, small investors jump into the fray, taking the market to a new high. But profit booking by institutional players pulls the market down.
Having burnt their fingers, small investors may take a long time to shed their fears about the market. Another way in which they are sucked into the syndrome is when they join speculators in unwinding positions at the slightest fall in the market.
A few tips Fight RI syndrome by staying invested long term— three to five years—come what may. Do not make (one-time) bulk investments. Spread in vestments evenly and take the benefit of cost averag ing.
Do not take loans for in vesting in the stock market. Corrections are welcome and will be healthy, but waiting for correction at this junc ture may not be a prudent strategy.
Right stock-picking can ensure returns even during a market downturn, and the vice versa is also true.
The market has already discounted March 2008 earnings. This calls for caution in taking fresh positions.
The trend is moving towards specific stocks instead of identifying sunrise industries for investing. Do not take exposure to any stock unless you have studied it thoroughly.
Do not marry stocks. When price reaches your pre-set level based on personal study, get out.
There is a general tendency to pick up the stock that has a two-digit value. The danger is that such penny stocks with low free float are mostly the targets of manipulators.
Medium capitalised (mid-cap) stocks are no longer cheaper as was brought out by the P/E ratio analysis.
Keep in mind, liquidity of mid-cap stocks will dry up immediately on a market downturn along with losing prices rapidly.
Do not react to changes in indices. They do not represent your portfolio as the latter consists of specific stocks and not indices.
Read analysts’ comments of long-term prospects with a pinch of salt. The euphoria is usually based on the present perception of future events, which can change Stay invested to take advantage of 8 per cent plus economic growth.
EXPERTSPEAK ANALYSIS Corrections are welcome and will be healthy but waiting for a correction at this juncture may not be prudent. The GDP is growing by more than 8 per cent per annum as we have multiple advantages like low median age population, low cost labour. The biggest boost has been provided by the low-interest rate regime MOVERS & SHAKERS Sectors we bet on now are software, banking and auto ancillaries. CAUTION Preferably buy large cap stocks that are well researched and have high institutional holdings.
- Lalit Thakkar, DIRECTOR-RESEARCH, ANGEL BROKING ANALYSIS IT and banking stocks have performed well in the rally so far. Pharma and FMCG stocks also posted good results in Q2. MOVERS & SHAKERS Going forward, sector selection may not work well. One has to be stock-specific. We have identified RIL, M&M, Infosys and ICICI Bank as the best bets. ADVICE Do not leverage on credit At this level, investing via mutual funds is advisable Invest in such stocks about which you are well-informed - Amitabh Chakrabarthy, HEAD-RESEARCH OF THE PRIVILEGED CLIENT GROUP OF BRICS SECURITIES.
-BS Srinivasalu Reddy
Note : I found this article good for any prospective investor in stock market in India.
Source : Hindustan Times.