Wednesday, June 29, 2011
Only bad news seems to be coming out from the markets. Greece default, high inflation, high interest rates hurting economic growth and corporate profits, Scams taking toll on governance, no big or small economic reforms by a government headed by the father of economic liberalization et all.
Pessimistic mood seems to be the order of the day. Investors are happier to put away their long term money in debt rather than equity. It’s just that equity investing for long term seems to be losing relevance. The feeling that you can invest tomorrow at lower price seems to be gaining momentum with every passing day.
What does all this mean for a person who is investing for long term? Dangerous frame of mind if such a person starts to develop such state of mind. It is during times like these in which the seeds of forthcoming rally are laid. You would have built up a sizeable chunk of equity holdings at low cost over a year or two of monthly SIP during such uninspiring markets.
For a serious investor who is investing with specific goals in mind 5-10 years away, such gloomy days can prove to be promising. You’ve just come across a period of time when you can quietly form a base of future fortune. In fact it is persistent equity investments during such period that you can look forward to getting a second earning member for your family.
We would like to re-iterate what we had pointed our in the 1st. part of the article:-
Don’t let market condition determine your asset allocation
It would be very tempting to divert your equity funds to high coupon fixed interest securities. We had said, “But abandoning equities now and moving to debt and cash would be a mistake.” In times like this it pays to keep the focus—on equities.
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 markets don't run forever. So it is only natural that in a volatile market investors should expect some short-term losses in their portfolios. Even a great company's stock can get banged around in a tough market. But that does not make you a loser (though you may look like one). While the old "buy and hold" mantra may seem like cold comfort at times like this, rest assured that it has a better long-term record than market-timing.
This too shall pass
However bleak the scene appears, it is not here to stay forever. Bargain valuations are available only in such times. But the key is to understand whether
such times are temporary or long lasting.
Till then “lagey raho”.
Sunday, June 19, 2011
It is an accepted fact that equity (stocks and MFs) have the power to deliver handsome returns over long time frame. However, many direct equity investors lack the ability to deal with the complexities that is required in dealing in stocks.
No expert is able to predict the right time to enter/exit a particular stock. There are innumerable stories of success and despair relating to stock market. The biggest hurdle for the direct equity investor is the buy list. It is the easiest thing to do. The key to making profits is “it is when you sell that counts.”
Indian equity markets are aligning to global markets and with increasing number of Indian corporates raising money from abroad, the factors affecting a particular company have become more complex, more varied and all the more difficult for an equity investor to comprehend. Media is agog with buy list daily. However, this freebie is fraught with too many risks. One of the biggest risks being biased advised being doled out. This is more applicable to investors who take buy decision based on “tips” given by brokers and experts. This noise creates a halo around a stock and more often than not an investor falls prey to such noise. The resistance to buy decreases as the price increases. Past (price) performance however compelling cannot be the guiding factor to buying a stock or a Mutual Fund.
One more reason why direct equity investors buy is that every body is buying. This is commonly referred to as herd buying. The basic assumption being that so many people cannot be wrong. The other reason being momentum buying. The information about most traded stock, stocks with high delivery volume and the stock which has risen most are daily published by business papers. This supports momentum buying. However, the fact that this momentum can wane as quick as it had rose is seldom factored in by buyers. Buying suddenly vanishes and investors are left with stocks quoting at a fraction of the price they were bought. It may go down to zero as well.
It is rather more easy and simple to choose a fund. The fund manager is more suited to build and manage a portfolio of stocks as he has far more resources --in terms of money, information and expertise—at his command.
Rather than compare performance of individual stocks against the fund, investors should pit their entire stock portfolio against the fund and see if their stock portfolio has been able to beat the best of the minds in fund management. 2.50% Fund management charge and your advisors fees are a small price for a far simple way to create long term wealth.