Amitabh Chakraborty, President (Equity), Religare Securities
The stock market is a place where people with money get experience, and people with experience get money. So what happens when the markets go through highly volatile phases, as seen in India in the week of 21-25 January? Investors have lost huge money in the brutal correction. Much of this was the profit earned over the last one year of the bull run. But those who lost money should not feel let down. The clear takeaway that I see in this latest bout of market mayhem is that investors need to be aware of the inherent volatility in equity markets.
They should also understand the fact that the markets will not maintain momentum in any one direction. In any bull market, the concept of long-term investment gives way to the lure of short-term trading, as making fast money always looks easier than long-term investing. It’s something like a rule of behavioural psychology.
Retail investors are always on the last leg of the information curve, and get affected the most. This is because they end up buying when distribution of stocks happens. It always pays to stick to fundamentals, because stocks with sound fundamentals might fall during a correction, inevitably bounce back as the market recovers.
This is why use of leverage should be prudent. Greed of any kind should always be under control. This is especially true for retail investors, because leverage is a double-edged sword. In a falling market, leverage can wipe out your networth, and margin calls always happen at the most inappropriate times. If at all, retail investors should buy stocks with minimum leverage, after judging the pros and cons of the investment.
Equity has an inherent risk, so it’s vital for an investor to judge his risk appetite. For instance, if you’re planning to retire soon, and capital protection is your goal, you really cannot afford to risk all your savings by playing the stock market. While we all know these basic rules of investing, behavioural psychology (as mentioned earlier) compels retail investors to indulge in day trading and momentum investing.
Peer pressure, a hyperactive media, as well as zealous broking houses add to this frenzy. It’s true that what goes down always comes up, and it’s equally true that the stock market always gives an opportunity to investors. Any steep correction, which happens not because of the fundamentals of the company but due to some exogenous factor, makes stocks available at lower valuations.
However, long-term investors will be better off getting into the market now to fish for quality at reasonable prices. Always, however, remember that yesterday’s hot shot stock need not necessarily be tomorrow’s winner. This is the time to pick up blue chips for core holding and to buy select mid caps for the long term. New investors should look at a mix of 60-75% exposure to large caps and the rest to mid-caps.
Emotion does not have any place in the market; losses should be booked immediately, because holding those positions, if they are beyond redemption, will not work. Psychology always prevents booking losses, as it is a submission of one’s own error of judgement. However, it is equally true that rushing to book profits also won’t do any good. That’s because there’s the chance that the positions you want to sell might be genuinely good holdings. Needless to say, all my recommendations are for long-term holdings, which should be bought without leverage, and with an expectation of about 25-30% as annual returns.
Dipen Shah, Vice-President, Kotak Securities
Let's face it: there are some individual investors who are very afraid right now. Part this is fear of losing money and this makes us forget our broader investment objectives. For investors of any kind, failures and losses are a reality. As an investor, you are bound to face some losses. It's not a question of if, but when. So, don't be discouraged by your failed investments. Instead, look at them as lessons. As long as the stock market continued its upward move, many investors often wondered whether it was right to enter and if any steam was left in it. First, the level of the market at any point of time should not deter a long-term investor from making a beginning.
That's because investing in equity is a process and not a one-time activity. The best way to benefit from equity investments is by investing on a regular basis over a long term. A first-time investor needs to understand that every investment carries a certain degree of risk and the potential to earn is directly linked to the degree of risk taken. Remember that an investment in equities will not make you rich overnight.
The most important thing is to understand the consequences of your decisions and not allow emotions to dictate them. This is easier said than done. To get a better grasp on investing, make short-, medium- and long-term investment decisions and assess where you stand when you are close to achieving them. It is essential that a long-term investor earns a positive real rate of returns (rate of return minus inflation). Equities, as an asset class, have the potential to achieve this and there are countless examples to prove this point. First-time investors should look at adopting a definite market discipline—start small, invest regularly. What you do during these volatile times is important because you can lose everything by acting inappropriately.
Bhavesh Shah, Vice-President (Research), Asit C Mehta Investments
Unlocking the value
In the recent past, the Indian stock market has seen four sharp falls. It’s interesting to see that with each fall, recovery has also been faster because there was never a doubt in the minds of investors about the sustainability of the Indian growth story. The market crash of 21 January was largely an issue of liquidity management.
I am sure the market will bounce back. In such a scenario, investors are looking to invest in sectors that had visible opportunities to grow, companies with earnings potential and order books in their favour, and those companies with a potential to unlock value for shareholders.