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Tips to read a BSE Sensex rally correctly and optimise gains

Tips to read a BSE Sensex rally correctly and optimise gains

Every time you miss a rally on the bourses, you can learn important lessons. Here are a few for those who were caught unawares as the Sensex zoomed 20 per cent in the first two months of 2012.

Did you keep waiting for the Sensex to fall to 14,500, as predicted by some brokerages in late 2011? Or did you invest heavily in bank and company fixed deposits and had no money for equities when the stock market took off earlier this year?

The reasons vary, but the result is the same. You missed another rally as the Sensex rose 20 per cent between 30 December 2011 and 23 February 2012. The broader index, the BSE 500, rose 23.5 per cent from 5,779 to 7,130 during the period. The Sensex is now 13 per cent higher than the 1 January 2011 level.

Out of 500 stocks in the BSE 500 index, 256 outperformed the index. Prices of 76 stocks rose 50 per cent or more during the period.

There's no use crying over spilt milk, but every time you miss a rally, you can learn important lessons - don't panic when the market is falling, don't pull out money in a hurry unless you need it urgently and, lastly, be patient.

Most small investors enter the market when the going is good and pull out during a fall. The trigger for pulling out is usually the panic created by too many conflicting views on the market's future.

Volatility unnerves most investors. However, they must keep in mind that sharp ups and downs are inherent in the way equity markets work. This is because stock prices are driven by speculation, future expectations, even perceptions.

So, sharp turns are natural in a market which has lakhs of investors with different aims, perceptions and expectations.

To add to this, large institutional investors, brokerages and portfolio managers try to pre-read market movements so that they can take short-term calls to make quick money.

These investments are made on the basis of short-term news triggers and not companies' long-term prospects. Often, these large players, with big investments, can cause sharp movements in short periods. Indian markets, due to less retail participation, are more prone than others to their influence.

However, if long-term prospects of the country's economy are bright and fundamentals of companies are intact, equity investments will reward those who stay invested for long.

Why do retail investors miss market rallies? As Tarun Bhatia, director, capital market, Crisil Research, puts it, "Whether it is a bull or bear market, retail investors usually participate (enter or exit) in the last leg. In a market rally, they wait and see if it will last. By the time they enter, the market has run its course. When the market starts falling, they remain invested in the hope that it will rebound. The delay in exit leads to higher losses."

In short, retail investors, despite their past experience, try to time the market and go wrong. Here, we list reasons why many retail investors were caught sitting on the fence when the market took off at the start of 2012.

Waiting for the 14,000 level:
Even the big brokers got it wrong. Large brokerages such as CLSA and Credit Suisse Securities predicted in November-December 2011 that the Sensex would fall to 14,000, which did not happen. Many investors kept waiting for the Sensex to touch these levels to enter the market.

Why you missed the bus

  • You waited for doom in the market, expecting the Sensex to touch 13,000-14,000
  • You got confused by varied expert views and predictions and stayed away from the market
  • You took cues from trading calls for long-term investment decisions and got it wrong
  • You went overweight on bank fixed deposits and gave in to the lure of rising gold prices
David Pezarkar, head of equities, Daiwa Asset Management, says, "It is time spent in the market that matters, not timing the market. Investors who decided to second-guess the market and wait for a further decline were left out in the latest rally."

Short-term alarms:
Abhishek Kumar, who bought shares of a private sector bank at Rs 290 in May 2011, sold at Rs 240 in the first week of January after a well-known technical analyst (who predicts movement of a stock by analysing historical price charts) said it would fall below Rs 200. Within 10 days, the stock crossed Rs 300. As we write the article, it is trading above Rs 360.

This is a common mistake retail investors make-taking hurried decisions on short-term or even intra-day price calls. The intra-day 'buy' or 'sell' calls are based on technical analysis and not fundamentals. If you take long-term investment decisions based on short-term calls, you will get it wrong.

Too many views:
A foreign brokerage said the Sensex would rise 16 per cent to 19,000 by the end of 2012. Another brokerage house, however, said the index would touch 13,500-14000 in 2012-13.

Who should you have believed? Taking a decision when experts themselves have such varied views can be confusing. It is possible that you could not make up your mind and stayed away from the market.

"By design, the equity market is a place where various views thrive. There is a set of experts who go by technical analysis and others who rely on fundamental analysis. The simple advice is to stick to one style/philosophy and be clear about the time horizon of investments," says Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Old Mutual Life Insurance.

Parked money in fixed deposits:

Due to rate increases by the Reserve Bank of India in 2010 and 2011, banks are offering attractive rates (9.5-10.5 per cent a year) on fixed deposits. Some companies are even offering up to 12.5 per cent.

This is not all. Infrastructure companies are offering 8.5-9.5 per cent on bonds which allow investors to claim up to Rs 20,000 income tax deduction.

At a time when equities were giving negative returns, these offers seemed irresistible. Investors locked in their surplus in these instruments, leaving nothing or little for equity.

However, if your portfolio was already tilted towards fixed income assets such as fixed deposits and bonds, parking more money in such assets might have hit your long-term financial goals.

What you should have done

  • Stick to an asset allocation pattern based on your financial goals instead of changing your portfolio too often based on short-term market movements.
  • Invest for long-term. Go by fundamental assessment of a company and stop worrying about high/low valuations.
  • Do not pay heed to daily, weekly or monthly calls by analysts if you are a long-term investor.
  • New investors should invest through mutual funds. Let the fund managers take decisions.
"Due to focus on immediate gains, investors move away from the planned asset allocation. When equity markets were not performing well, many made a beeline for bank fixed deposits without evaluating the pros and cons of such a shift," says Kapil Narang, chief operating officer, Ameriprise India.

Gold rush:
Gold prices rose to Rs 28,000 in the first week of November 2011. It was also the time when gold sales picked due to Dhanteras and Diwali (last week of October 2011), considered auspicious for buying gold. Banks took to selling gold coins and medallion in a big way and mutual funds came out with gold exchange-traded funds and gold funds.

People went on a gold-buying spree. With substantial money invested in gold at such high levels, there was no money to invest in stocks, some of which were trading at 50-60 per cent below their all-time high in November-December 2011.

You may have missed the surprise rally at the start of the year, but all is not lost. You should keep investing irrespective of the volatility, highs and lows.

Stick to an asset allocation pattern, which means if you are comfortable with a high proportion of stocks in your portfolio, do not reduce equity exposure when the stock market falls. Invest systematically when you have money irrespective of valuations and market levels.

And last, take predictions of equity experts with a pinch of salt. They, too, make wrong calls at times.

Published on: Apr 19, 2012, 12:00 AM IST
Posted by: Gaytri Madhura, Apr 19, 2012, 12:00 AM IST