Benefits of market cycle

The only way to master the art of stock investing—low risk and high returns—is to take the time-tested route of long-term investing.

Print Edition: September 4, 2008

• Inflation and market cycles usually have an inverse correlation

• The current market cycle is likely to last for at least a year

• Rising costs and new capacities will show up from the next quarter results

• Use short market rallies to off-load weak stocks in your portfolio

• Watch out for market anomalies, when valuations of blue-chip stocks are lower, and buy them

The only way to master the art of stock investing—low risk and high returns—is to take the time-tested route of long-term investing. Money Today has always preached the virtues of this strategy. But investors—rattled by the yoyoing Sensex and the fact that they cannot predict whether the future will offer respite or further dent their portfolios—can be forgiven for thinking that long-term investing is subservient to market cycles. In times like these, when the market is both bearish and volatile, when every opportunity to grab a good share for a bargain is fraught with risk (what if the price of the share falls further), you might wonder if it is more prudent to stay out of the market till it recovers.

Allow us to prove this notion wrong. If you do decide to abstain from Dalal Street, be prepared for a very long wait. Given the uncertain global and national economic situation, the market is likely to stay bearish for at least a year. And as a stock investor, you shouldn’t, and indeed cannot afford to, be inactive for so long. So what should your strategy be? The answer depends on where you think the market is headed at any given point in time.

The volatility in the market offers two clear opportunities for investors—the phases of recovery allow you to sell the bad stocks in your portfolio, while the periodic downswings will offer the opportunity to pick up good long-term bets. As Nandan Chakraborty, head of research, Enam Securities, says: “Investors should use this bear rally to prune weaker trading positions, while picking up blue-chips for the core portfolio if the valuations are right.” At the same time, the current market scenario leads to certain inconsistencies that promise opportunities in the long term. Says Sanjeev Patkar, head, research, Dolat Capital: “We feel the market is still incoherent and has diverse anomalies where valuations are concerned—a construction company trades at a multiple of 15xFY09E, while quality assets such as Maruti trade at a 7xFY09E (core earnings).” Some quality businesses have gone unnoticed in the market, so watching out for such anomalies can help you build a solid portfolio.

Word’s worth

C.B. Bhave
“The reduction in timelines will reduce the market risk faced by investors and issuers, and ensure a faster turnaround of money”
—C.B. Bhave, Chairman, Sebi, on cutting the time for a rights issue from 109 days to 43 days

“Inflation may touch the 13% mark, (but) trends of moderation should begin in December”
—C. Rangarajan, former RBI chief

“Investors looking to put money in income schemes could try fixed maturity plans, which give better post-tax returns compared with traditional products”
—Nimesh Shah, CEO, ICICI Prudential Asset Management

“It makes sense to go for a fund that invests in frontier markets because these countries throw up a lot of potential for investors”
—Anthony Heredia, CEO, Morgan Stanley Mutual Fund

Source: Business Standard, The Hindu, IANS, Economic Times

The bottom line is that volatility is not your enemy if you know how to use it to get rid of the once-promising-but-now-dud stocks at a decent price during a relief rally and pick up long-term bets, current or potential blue-chips, when markets fall below the levels that fundamentals justify. The investors who make such use of volatility will ride the market cycle and gain the most when the bull run returns.

— Rakesh Rai

Defining disease

Have you ever had your medical claim rejected by insurance companies citing “pre-existing health condition”? The perennial debate on the health conditions that are covered by policies claiming to insure pre-existing diseases and the ones that are excluded, has finally been resolved. The General Insurance Council (GIC), a statutory body for all non-life insurers, has provided a clear definition. From now on, pre-existing exclusion will mean that “the benefits (of health insurance) won’t be available for any condition, ailment or injury for which the insured had signs or symptoms, and/or was diagnosed and/or received medical advice/treatment, prior to the inception of the first policy, until 48 consecutive months of coverage have elapsed after the date of inception of the first policy”.

Says K.N. Bhandari, secretary general, GIC: “We have issued an advisory to all insurers suggesting that they apply the same definition to existing policies. But it is their discretion to adopt the definition.” The policies issued from 1 June 2008 will have to adopt the new definition and will cover pre-existing diseases from the fifth year of the policy, should the policy-holder not make any claims for the first four years. Strangely, only health insurers and general insurance companies selling health plans will have to follow this diktat. Nonetheless, policy-holders will no longer be at the mercy of the whims of the insurers, and that is good news.

Pre-existing diseases will include:
•Hypertension, leading to heart condition
•Diabetes, leading to other ailments
•Obesity, leading to health deterioration

— Narayan Krishnamurthy

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