ClicksandWrites

Tips for small retail investors to ease their nightmares

Posted on March 26, 2008

Tips for small retail investors to ease their nightmares

17 Mar, 2008, 1620 hrs IST,Shakti Shankar Patra, TNN

Ranjit Sehgal works as a system analyst at one of the top IT companies of India. Apart from forwarding emails, which his job requires him to do, he passionately tracks the domestic equity market. His favourite anecdote about the market until recently was: “Each time the market crashes, if you sell your house and invest in the stock market, in a month, you’ll be able to move a couple of suburbs closer to South Mumbai.”

Two months ago, all you had to do was name a stock and he would have told you its last traded price. You name a brokerage and he would have told you which stocks they were betting on. Any news or rumour, no matter how trivial, as long as it was remotely related to the equity market, he had it covered.

A day didn’t pass by without him arguing, disputing, advising or seeking advice on various message boards on the internet. He was a much sought-after man by friends and acquaintances, who had all heard of his uncanny ability to spot a multi-bagger and wanted to find a better avenue for their cash than the low-risk low-return bank deposit. He followed his own advice and put all the money he had to spare into stocks — for he believed that stocks were king.

But that was then. Today, with the Sensex in a free fall and bears mauling virtually every stock, Ranjit is in a funk. He has not logged on to his demat account for the past couple of days and zaps the business channel the moment it comes on.

His portfolio has lost over half its value and every passing day seems to erode it further. Ditto with the message boards, which are now filled with jokes like: ‘the easiest way to make a million through the stock market is to start with two million’.

He just can’t understand what went wrong. During the past three years, each time the market had corrected sharply, he had bought into it and turned in a heavy profit. He had done his own analysis, mapping the Sensex against the Dow and had been convinced that decoupling was taking place.

This time round, too, he had bought into the Sensex when it first fell in January and sure enough, it had rebounded. Then, when it fell again he bought even more. Unfortunately, it has never recovered since and he suddenly finds himself sitting on a mountain of useless paper.

Most investors are likely to identify with Ranjit’s predicament. Suddenly, that demat account is a nightmare and the fixed deposit a dream investment. While there may be many who are undergoing this traumatic experience for the first time, old market hands will tell you that this is just an umpteenth rerun of greed melting into fear.

The real predicament that they now face is: Where does one go from here? While there is no one-size-fits-all solution, here is some advice that small retail investors can use to mitigate the nightmares they are enduring…

Never hold on to what you won’t buy now

There’s no point in burying your head in the sand like an ostrich and waiting for a miraculous rebound. An active interest in the state of affairs is a must. The first thing you should do is take a long, hard look at your portfolio.

Does it have more of established companies with proven track records, or does it consist more of stocks like Nagarjuna Fertilizers & Chemicals and Reliance Natural Resources (RNRL), which you bought because they were ‘momentum plays?’

Having done that, get rid of the momentum stocks. After all, with the momentum gone, it’s time for these stocks to go as well. The rule is simple: ‘Never hold on to something that you wouldn’t buy now’ . Never ‘hope’ or ‘pray’ . It is either a ‘buy’ or a ‘sell’.

So, it doesn’t matter at what price you bought such stocks — just dump them and collect whatever cash you can. If you have blue-chips in your portfolio like Reliance Communications, Bharti Airtel, Hindustan Unilever or ICICI Bank, to name but a few, you can actually choose not to sell them. In the long run of say, 3-5 years, there is a good chance that you will still earn a return higher than what a bank deposit can give you in the same time period.

Once bitten twice shy

Having lost money in the market, it is but natural that you may have decided to stay away from it totally. That, however, is not such a smart thing to do. As any seasoned investor will tell you, the best time to buy is during a bear market. That said, it is important to keep returns expectations realistic and ensure that you get into stocks, which have a sound business model and visible cash flow. When you invest in a stock, you are basically buying a small stake in a company.

Generally, people tend to ignore this fact. But the moment you ask yourself about the company you want to own, the answer is definitely, Reliance Industries and not Nagarjuna Fertilizers; it is definitely Infosys, but certainly not Himachal Futuristic. It is important to buy stocks for their intrinsic worth and not on the basis of expected short-term gains.

Only fools rush in where angels fear to trade:

If you are someone who was sitting on the fence with cash, praying for a correction, ready to jump in for his first investment in equities, then remember to go easy. For only fools rush in where angels fear to trade. Although buying into a correction is something that has paid rich dividends in the past 3-4 years, the same may not necessarily be the case this time.

With global financial markets in turmoil and a general election looming on the horizon, you would do well not to assume that the market has bottomed out. Just because the stock you were planning to buy has fallen to 50 from 100, doesn’t mean that it cannot go to 25. So, try and enter in a staggered manner. In times such as these, as the saying goes: ‘cash is king’ .

Sense and sensex:

Often, investors get too obsessed with the level of the Sensex and forget to concentrate on the fundamentals of the stocks that they hold. There are umpteen instances of individual stocks underperforming in a bull market and those outperforming even in a bear market.

This is because the index reflects the entire market and does not necessarily reflect what is happening with your stock. So, let analysts talk about Sensex levels while you track your stock.

India, still shining:

With the garbage out of the house, we need to decide what stocks to buy, if any. Just because the decoupling theory has been thrown out of the window doesn’t mean that we are absolutely married to the US economy.

Although a slowdown in the US will affect export-oriented industries in India, it will have a limited impact on most of India Inc, since by and large, the India story is about domestic consumption, rather than exports.

And if the Budget is anything to go by, then the government is definitely in a mood to leave more money with consumers. With more money to spend, the sectors that are expected to benefit are consumer durables, FMCG and retail, to name a few.

The relative outperformance that these sectors have shown during the current turbulence is a good indicator that they may well hold their own even in a bear market. For some of ETIG’s top picks within these sectors, take a look at the stock ideas discussed in the current edition.

Money matters:

Lastly, and most importantly, the fact remains that we had an absolutely unbelievable and overtly extended bull run of around five years. During this period, the Sensex went up seven times, with most stocks going up exponentially.

This couldn’t have continued till eternity. But at the same time, this doesn’t mean the end of the world. Equity markets always swing between overexuberance and absolute despair.

So, don’t lose heart; there will be an end to this carnage. But to enjoy the fruits of the next boom, invest in fundamentally sound companies and always have a substantial amount of cash in hand. For, while you can buy a future multi-bagger today, tomorrow it may end up being a lot cheaper.