How to invest when the stock market is at historic highs

We are at the cusp of something big today and retail investors need to wake up and participate early to make the most of it.

For those of us who like following the stock markets on a daily basis, the current no-noise, no-nonsense bull-run is very surprising.

In the heydays of 2006-2007, when markets were euphoric, the mood of whole country was bullish. Financial channels beamed reporters wearing ear-to-ear smiles and predicting the next go-go levels for the benchmark Indian index, the Sensex.

Whether Sensex will reach 25,000 or 50,000 was the only talk of the town.

Cut to April 2014, markets are again trading at their all-time highs for the Sensex and Nifty indices, and there is a deafening quiet all around us. Any chatter of stocks or investing with friends is met with a curious – what's wrong with you -- kind of glance!

India has lost its plot and lost it fast enough for domestic investors to lose faith in the bourses.

Truth is, equity is the only sustainable way to generate wealth for the long term in a developing country like India.

With population increasing, cities ballooning out of proportions, entrepreneurs starting new business every day and companies struggling to meet domestic demand for everything under the sun, it is really hard to be bearish about stocks.

But how to invest now when the Sensex and Nifty breach their all-time highs every day?'

Has the retail investor missed the bus again?

What should be the logic to buy anything in this seemingly confusing market?

We look at data and find out.

StockFundooLiveCalls.com provides insightful and in-depth capital markets analysis. Powered by technical analysis and price action, we offer live stock analysis updated on intra-day basis.

Who is buying stocks if Indian economy is struggling?

With the banking regulator Reserve Bank of India projecting the growth rate for Indian economy at a modest 6 per cent for the next financial year, it’s hard to be bullish. The gaga times for economy in 2006-07 were when economy was roaring at 8 per cent-9 per cent every year.

However the key thing to note is that domestic Indian consumer demand has not slowed down even in past few years of economic stress. Indians is still hungry for better living standards. Consumption as a dominating thought process for investment is going to work for many years to come.

Although domestic institutional investors (like say the Life Insurance Corporation of India) might be selling these days, the foreign investors have demonstrated faith in our markets from past many months. FII thought process is simple and tough to miss! With a regime change at the centre almost a given fact, Indian government will now have to adopt policies that are pro-market, pro-growth and pro-industries policies in next few years.

As the sleepy Indian elephant has woken up now, after getting a taste of growth in the past decade, it is difficult to stop the Indian growth juggernaut. FIIs seem to realise this and have more faith in India than Indians themselves.

Sectors with intrinsic value today

Even though Nifty and Sensex might be breaking their 5-year old benchmarks, many key sectors are still sleepy and craving for action.

Large caps like IT, pharma and consumer stories have ran ahead of themselves but midcaps and smallcaps have a long journey ahead of them.

There are key sectors like auto ancillaries, chemicals, banking, finance, cement, fertilisers, sugar, consumer durables, and engineering which have not yet participated in this index frenzy.

It is difficult to imagine a sustainable bull run without these core sectors performing and midcaps and smallcaps doing a parallel jig.

Following Warren Buffet's intrinsic value paradigm, it’s a good strategy to focus on sectors like these with possibility of good returns in years to come.

When to buy

Having focused on sectors and researched stocks, it’s a challenge to find the right time to buy. However, in a growing economy like India, there is actually no right or wrong time to invest.

When one goes out for gold shopping or investment in silver coins, one thinks about how her/his money is now safe from inflation, and will safeguard her/ his children's future in years to come.

This is exactly the mindset one needs to adopt in investing in Indian companies which will grow aggressively in next ten years.

The time to buy is irrelevant actually; a method to buy is to create a monthly pool of fixed amount one can invest in stocks or mutual funds.

The SIP way is the simplest and best financial innovation for a retail investor. One should regularly post a fixed amount of one's saving in capital markets to be an active participant in the great Indian growth juggernaut.

The time to start is now and every month from now on.

When to sell

It’s a good idea to keep booking profits in a regular manner. There is no one who went broke by booking profits in equity markets.

If your investment has grown by a sizable amount, lets say, by 40 per cent-50 per cent in past 2-3 years, one should book one-third or one-fourth of her/his holdings and keep the cash to reinvest in the next downturn.

Selling on highs and buying on lows is the only way to make money; human mindset, however, works exactly the opposite way. One gets excited about gold and property when they are costly and unaffordable and bearish about stocks, when they actually are affordable.

As monks say, there is only one enemy and it lies within. To get wealthy and rich and to participate in the Indian growth story, one needs to break old habits and adopt new financial habits. We are at the cusp of something big today and retail investors need to wake up and participate early to make the most of it. 

Click on MORE to see another feature...