Retail equity investments have not gained much acceptance as a wealth-creation engine. Most still see them as a way to make quick gains.
If you look at one-year Sensex returns immediately after any election year, the numbers are startling. On May 18, 2009 (first day of the 2009 LS polls), the Sensex was at 14,285. On May 18, 2010, it was at 16,781, a return of over 18%. The same was true of the 2004 LS elections. While the Sensex was at 4,505 on May 17, a year later it was at 6,528, a whooping return of 45%. The only exceptions were during the fractured mandates of 1996 and 1998, where one-year returns were in single digit and negative, respectively. So, what does the one-year return from 2014 seem like? With a majority mandate, we are looking at positive returns from the Sensex.
Stock-picking is key
The run-up in stock prices across the board has given those not invested a reason to be in the market. One must look at equity investment for wealth creation as a multi-period holding. However, for the instinctive investor, short- term horizon remains key.
One must observe the trend and follow it, set stop losses and book gains.
For an investor with a multi-period horizon, understanding the value and price is important. Always remember that price is what you pay and value is what you get. So, a good stock at an expensive price is still expensive. One needs to spell out the the expectations from the investment and analyse whether the investment fits into one’s scheme of things and financial goals. Always understand the asset class first, and invest in line with your short-, medium- and long-term needs.
Equity investments always pay in the long run. The Sensex has moved from 4,500 in May 2004 to 25,000 in May 2014. This is a neat, 5.5 times returns in 10 years. returns are likely to be higher as the period increases.
Always make concentrated bets in equity. Look at the current price levels and, once you are convinced about investing in a certain company with a good corporate governance track record, start investing in a staggered way. That way, you will be protected from any downside and the impact will be marginal. Over a long investing horizon, quality scrips almost always gain, provided the investor has stuck to the original investment philosophy.
Invest without thinking too much about immediate price movements. The euphoria will slowly ebb and reality will take control. Always keep cash holdings at 20%, or any level that gives you comfort, to benefit from volatility in prices. Remember, regular investing is key to successful wealth creation.
* The write is founder and managing partner at Zeus WealthWays LLP