Publication: Business Standard, New Delhi; Date: Dec 6, 2009;
Investment decisions based only on current events can lead to Serious losses. A disciplined approach is better
Last week, the headlines of almost all newspapers screamed panic on Dubai’s attempt to reschedule its debt. The event reminded a lot of people of the Lehman collapse in October 2008 and people quickly jumped to the conclusion that equity markets around the world were in for trouble. The markets around the world had reacted to this news and as expected, Indian markets cracked. The second day (Friday), the Sensex had an intraday low of 16,200, recovering by the end of the day but still down by 3.5 per cent from the previous high.
Immediately, a large number of experts started predicting that the long-awaited correction was just around the corner. The Sensex was heading to 12,000-14,000 levels, depending on which expert’s opinion you took.
There was a rush to reach the exit door first. Some even said: “See, I was right in my predictions.” Most people, who had missed the opportunity to enter the market when the Sensex was at 8,000-12,000, felt a bit vindicated. Some sensed that there would another opportunity to enter soon.
But the mood was to change within two days. Come Monday and the GDP data of 7.9 per cent growth was released. The markets suddenly changed direction and ended the next couple of days northwards of 17,000. This suddenly seemed to change everyone’s views and now there was talk of 18,000 levels being achieved.
What typically happens in all this hoopla is that people miss opportunities and are generally unable to take a prudent decision.We have seen such a situation several times in the past year. First, during the run-up to the general election, the world thought the third front might come to power and we would be seeing the 6,000-level Sensex days. The election results stumped almost everyone, with a 20 per cent circuit filet hit in a just a few seconds. Then, on Budget Day, July 6, the Sensex fell by 800-odd points and the next two days saw additional pain. However, the markets quickly turned around to make a new high. Diwali saw markets trading at 17,300, only to see a sharp fall in just a few trading sessions.
The markets then touched near-15,000 levels only to end November 3 at 15,404. There was a general fear about far lower levels. But positive global cues and good GDP numbers helped markets to rise again. Of course, the 11 per cent correction in the indices itself could have been a good opportunity for many. But waiting for further correction hurt investors.
This brings us to the main point. The fact is that the world as well as the financial system is actually full of surprises. No one knows where the next bomb could come from. At the same time, the data coming out is pointing at better days to come. Can someone guarantee that the market cannot go to 21,000 in the next one year? Forget the next year, no one can even say what will happen a few hours down the line or the next day. The financial system is so closely connected that if some participant sneezes one day , others will catch cold quickly. The point is that there is no way one can enter at the bottom and exit at the top. The best way to invest is in a staggered fashion.
Additionally, there are so many data points right from bad news from overseas markets, to local scams, inflation , geo-political risks, dollar trade , interest rate hikes, oil prices and so on, that it is difficult to predict what will happen now. Most humans are, however, always keen to know the future and this is why you see so many forecasts, and predictions being doled out. Astrology has even extended itself to the markets and you see the arrival of many financial astrologers as well.
Investing, on the other hand, must be very simple and one must do very simple things like buying on dips and buying even more on further falls, and practice the virtues of patience with sound investments.
Index Name From (17/10/09) To (3/11/09) Absolute
BSE Sensex 17,326.01 15,404.94 -11.09
S&P Nifty 5,141.80 4,563.90 -11.24
Let us understand this with an example. A company with 15 directors and senior management were all given Cipla shares in the early 1990s. All of them had around 400 shares. 14 of the 15 sold the shares when they got a 50-100 per cent return. The person who held on today has a stupendous 70,000 shares worth around Rs 2.5 crores. No asset class can match these kind of returns. At the same time, this gentleman demonstrated amazing patience, believed in a story and has thus got mind-boggling returns.
The point is that financial markets will be full of noise going ahead and that’s the way they behave. There could be various things that could be done right from investing on dips, booking profits, churning between sectors and selling bad investments. This is a function of one’s overall portfolio, equity investments, returns earned so far, risk profile and so on. However, the person who remains sane during such times will always comes out as the winner in the long run. And it is always not a year or two, but over 10-15 years.
In other words, whether it is good or bad times, either have a disciplined approach towards investing, which is through systematic investment plans of mutual funds. Or, if you own blue chip stocks, just stay invested for an adequately long period and you will not be disappointed.
The writer Amar Pandit is director, My Financial Advisor
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