Between October and December 2003, the stock market posted a fantastic rise. In fact, the 1,000-point rally on the Bombay Stock Exchange in December alone was unprecedented. Then, as in earlier bull runs, investors were very optimistic. Even as the Sensex breached the 6,000 mark, there was a talk of Sensex 7,000 and, at times, Sensex 10,000!
How different things have turned out to be! But now, sadly, investor sentiments have swung to the other extreme.
Like in cricket, most people have an opinion on stocks. And a lot of investors/speculators operate on what can be termed as 'gut' or 'instinct' -- like placing a bet on the match, where either you lose or win in a matter of a day, or five days. Most are attempting to time the markets (typical television/broker talk -- buy at 150, with a stop loss at 140, or something like that).
So when odds improve during the match, you square off your bet and make the difference (if that is possible). Few have any idea of valuations or the business. But, most investors/speculators have a view on stock price. This is a perfect recipe for disaster, in our view.
In several investor meetings, over the last couple of days/weeks (post the 800 + point fall in the markets) we have been trying to put across the point that it is very difficult to time the markets to perfection. So just as it was difficult for you to sell at the peak (Sensex 6,250) it may be difficult for you to enter at the bottom of the market.
Ideally what you should do is to start making investments in small amounts and at regular intervals. But the view from the investors/speculators now is that the markets will continue to fall, to 4,500! So for us it is always swimming against the tide of investors'/speculators' opinion (some call this a contrarian approach, but that is debatable).
What's our view?
- Just as you, the retail investor, could not call the peak of the market, you will in all probability miss the bottom of the market too.
- There is a need for change in your investment approach. To start with, look at the stock market as a place where businesses are being bought and sold. Each business has its own fundamentals and it should be evaluated accordingly. Do not let 'technical' factors alone lead you into taking investment decisions.
- If you feel that the markets have had a significant correction, like we do (but by no means are we saying that the correction is over), it may be time to start making small investments at regular intervals in well managed diversified mutual funds. Over a period of time you will end up with a good average cost. If you try to wait for the bottom, you may miss it altogether.
- Such investments if pursued with discipline should place you well to earn a very good risk-adjusted return over five years.
