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Don't make it worse

Don't make it worse

If you are stressed about your market exposures, consider an exit. The market can remain irrational longer than the rational investor can stay solvent. Sometimes the winning trade is not equities.

Dipen Sheth
Dipen Sheth

Investing is an inexact science. We tinker with our investments and get results. Sometimes the results make sense, and sometimes they look like mistakes, so we tinker on.

As the fund manager of Money Today’s model portfolios (as also for real money belonging to my real clients), all my investment decisions are under constant and minute scrutiny by my clients and readers. The mistakes they highlight (however unpleasantly) only help my evolution as a fund manager.

Here are the top five mistakes most appropriate for the alleged bear market that you should avoid:

1. Buy because prices have fallen
Reliance is down over a third from its peak, and Larsen is selling for 40% plus discount. This is not reason enough to buy. What’s become cheap can get cheaper. In bear markets, frontliners’ prices can fall more than you imagine. Ask those who have seen Tata Steel (or Tisco) trade for under Rs 100. The question to ask is whether today’s price is a “fair price”, given the earnings and growth potential of the company.

2. Buy because PEs are low
As bear market progresses, PEs fall because the market does not accord the same respect to earnings. This means future earnings face a higher risk. Downgrades on estimated earnings may pull up PEs to very high levels. Ironically, for commodity companies such as Tata Steel, ONGC, Hindustan Zinc and Reliance, the time to buy is often, though not always, when several quarters of indifferent performance and earnings downgrades result in high PEs. Contrast this with the vulnerability of investing when they are riding the crest of their earnings cycle: high earnings and seemingly low PEs.

3. Stay invested, markets will rise
No. If you are stressed about your market exposures, consider an exit. The market can remain irrational longer than the rational investor can stay solvent. Sometimes the winning trade is not in equities. It looks that way today, when interest rates are close to peaking, equity earnings and PEs are falling and sentiment on money flows is not positive. Consider what most mutual fund houses are doing to kill all appetite for equity: almost risk-free debt is being funnelled via FMPs to investors at yields of over 11%. Debt is the winning trade, at least till the clouds clear.

4. Don’t book losses
Contrarily, book losses for items that you would not buy or add at current market price. If I do not feel like buying one of our model portfolio stocks for a new client, then it is better to sell it for others too. Ultimately, the answer lies in the absolute merit or demerit of a stock. If you’ve bought a great business that’s going through some unexpected pain, be patient. But if the story is going sour and the actions of the management do not inspire confidence, why ride down further with them? Get out.

5. Increase equity allocation
Dangerous, especially if you have no clue how long the bear market will last. You can end up with your lock, stock and barrel in stocks which spells trouble. Regardless of how sure you are about your stock picks or the bull market or how much you respect a mutual fund, Never allocate all your money to equities. The volatility might leave you shell shocked.

Dipen Sheth is Head of Research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws