May 24, 2009
Indian Stock market has greeted the clear cut mandate in favour of Congress led UPA and absence of “Left” interference with a poll vault jump of 2110 points on May 18 just with just 60 seconds of trading. Sensex had gained 26% in 2009 but within few seconds on May 18t, Sensex gain jumped to 48%. The rupee climbed 3% against the dollar, the biggest gains in two decades. The market was looking for stability and it got what it wanted.
Fearful Black Monday - May 17, 2004 and Hopeful Golden Monday May 18, 2009
Current euphoria is a contrast from the Congress victory five years ago. The Sensex plunged 11 percent on May 17, 2004, the most in more than a decade, twice attracting suspension of trading on investors fear and concern that a government formed by the Congress Party and communist allies would slow the pace of growth. Left party was the strong component of 2004 UPA government. The Sensex stood at 5020.89 at the start of trading, and fell to 4227.50 in one day. The Sensex closed at 4505.16. Monday May 17, 2004 considered as Black Monday in Indian Stock market history.
On May 18th 2009, market zoomed on HOPE, a hope that the pro-reformist agenda of UPA government without Left party, will accelerate the growth and economy will move into fast track. Monday May 18, 2009 became Golden Monday for Indian market.
At the end,. Indian democracy is the real winner. Indian voters gave a strong message to the entire world and whole world started looking at India once again as a potential superpower.
Foreign Institutional Investors are back.
FII’s always keep close watch around the global and Indian politics and economy and are the first ones to sniff any positive or negative developments.. In April itself, FII ‘s started pumping money into Indian stock market. In April 2009 they have made a gross purchase of equities worth Rs 40881 crores, while they sold shares valuing Rs 33497 crore, resulting in a net purchase of 7384 crore.. In May already in first 3 weeks they have purchased equity worth 54520 crores while they sold equity of 40344 rores resulting net buy of 14176 This is the highest net buying by FII’s since October 2007.
According to data for the past 24 months, market movements show that the market has moved in the direction of FII trend. Data also shows that FII selling was highest in Nov-Dec 2007 and Jan 2008 when the market was at peak. FII’s wants to invest in the economy which is going up and India remains a long term reliable and profit play for FII’s.
Retail investors need to be very cautious
To make money in the stock market investors should buy when the market is low and sell when it is high. But unfortunately individual investors who are usually “late comers” in the market usually buy high with greed and sell low in panic.
“It is optimism that is the enemy of the rational buyer” Warren Buffet
Once again retail investor’s mindset has changed suddenly. There is huge cash waiting to enter into Indian market. Suddenly growth became visible and hence retail investors started chasing growth stocks instead of value stocks. Construction and Real estate stocks, which have been hammered over the last year, saw sharp rise in their value as investors bet the incoming government would boost infrastructure spending. The markets are looking forward to the government’s reinforcement in foundation of pension, insurance and disinvestment areas. And another hope is that the Central bank will trim the cash reserve ratio for banks and will adopt measures to drive interest rates down.
Individual investors are backward looking, and the stock market is forward looking. Legendary investor Warren Buffett once remarked about about the Internet bubble: "The world went mad. What we learn from history is that people don't learn from history”
When things look bright, analysts are back in business TV screens with smile giving their recommendations and predictions. Top analysts are of opinion that Sensex will hit 21000 in 2010. Same analysts were proclaiming the glory of Sensex in December 2008, predicting it touching 25000 by mid of 2008. Markets tend to swing from"depths of despair to euphoric highs and we are probably at euphoric highs right now. This might take us to spectacular height.. But caution is the watchword for retail investors
As the market peaks, almost anything is considered as a “can’t miss” investment.. However, investors should keep in mind that rampant euphoria is occasionally the set-up for a violent correction. The rally may be halted any time by global markets, monetary and fiscal constraints and bad news form manufacturing and industrial data. It is better for long term investors to look for value and should not get caught up in euphoria.
“For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get” Warren buffet
Conquering greed, fear and impatience:
Greed, fear and impatience are the three worst enemies of an investor and investor wins when he conquers these three enemies. Fear and greed are two biggest emotions which moves market up and down and impatience is a emotion which derails the investor form his investment plan. The primary concern of investment is to make more money and accumulate wealth. But if emotions start ruling the investment strategies, inevitably, investor will make a wrong decision. An investor with” get-rich-quick” mentality loses his control over the emotions resulting losing track of this investment plan
Reason for these emotions is ‘Volatility” which is a inherent feature of stock market. Volatility is a reality that can't be avoided. More we can control our emotions, the better off we are as an investor. . When markets are rising, investors tend to forget about the fundamentals and overall strategies and that can lead to problems. When market reached 20000 in December 07, analysts were quick to proclaim the glory of Sensex predicting its reach to 25000.. Retail investors poured money into the stock market when Sensex was trading at expensive 28 P/E (price-earning ratio).
Situation was opposite when valuation was very cheap (Sensex P/E less than 10) and Sensex was trading 8000-1000 levels. During this period out of fear investors either rushed out of the market or tightly holding cash Analysts were quick to paint a gloomy picture and to predict market will bottom at 6000 levels. Investors have let fear dictate their investment decisions. Many investors who had discontinued Systematic Investment Plan (SIPs), have missed the recent rally.
Letting fear dictate investment decisions and rushing out of the market at an inopportune time will cause disappointment. “I should have invested when market was 8000 levels” this is the general statement from the investors.
How to take rational decisions
It is almost impossible to time the market. Market will take off with any positive news when investors least expect it and it will not look back for some time. This is what happened on May 18th. All those who stand at the sidelines holding cash will feel disappointed and frustrated having “miss” the chance to reap the benefits of sudden rally.
A patient investor is always successful and never misses out. An investor who makes compounded annual growth of 20-25% for long term is a real winner. An investor who made 100 percent in a short time might not even be there as an equity investor in long term. One who uses the market to make quick bucks often loses more than he makes because market is erratic and unpredictable. A patient investor is the one who has a clear cut plan, understand his risk profile and then invest. A systematic Investment plan is the best way to win over emotions and take rational decisions.
Those who have sufficient knowledge and time to monitor the market can buy shares systematically through their demat account. However, recent study revealed that most of the investors who have opened demat account have become traders rather than investors. May have become addicted to trading in stock market have lost focus on their actual job and profession, even lost their job.
The best way is to participate in Indian growth story is buying “ basket of shares” through mutual funds where professional fund managers with in-depth market research buys shares on behalf of investors. Systematic Investment plan in mutual fund is a brilliant strategy which saves you from the volatility of the market and allows a investor to participate in stock market irrespective of market conditions in a disciplined manner.
Investing in SIP is very simple. Investor should have pancard to invest in mutual funds Those who do not have pancard casn obtain it easily. Investor can easity build a corpus of more than 1 crore for retirement or for child education with monthly investment of Rs. 10000 for 15 years with 20% compounding annual growth. Diversified mutual funds have given more than 25% compounding returns over last 15 years. Those who have started their SIP investment one year back has already have a return of approx 20-25%. Sensex was at 17000 level during this time last year and at present it is at 14000 levels During this period SIP investors have gained approx 20-25%.
There is tremendous amount of hope for medium term and long term growth due to the decisive pro-reform victory. UPA government has a huge responsibility to perform on the economic front. Currently SENSEX is trading at 18 P/E. For short term we have concern on valuations. and also concern on current account, budget deficit and weaker rupee. The Reserve Bank of India Governor on May 22nd has cautioned the new Government that another fiscal stimulus package would exert pressure on the rising fiscal deficit. However he is very hopeful that right mix of macroeconomic policy and corporate strategy, the economy will emerge form the global recession stronger than before. Stock market is a leading indicator of the economy. Market is already charging ahead reacting to the next part of the economic cycle. 2009 -10 is a year of sowing and accumulation. As political risk is very low, Indian fundamentals offers a golden opportunity to create long term value for the investors by investing in the growth oriented quality businesses of 2nd fastest growing economy.
“20 years from now, you will be more disappointed by the things that you did not do, than by the ones that you did…so, explore, dream and discover” – Mark Twain
The writer is financial consultants at Win-Win Investments, Mangalore, can be contacted at email: firstname.lastname@example.org or Cell: +91 9980202153
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