A wise investor, while teaching his acolytes, once said that investing, like life, is not a difficult business but people make a mess out of it by getting distracted by greed.
To lose weight, one requires to do either or both of the two things: exercise and control diet. But not many have understood this simple lesson. As for investing, or creating wealth, too the story is the same. Buy stocks in companies with sound value, reliable management, and hold them. Many tend to take the short cut and speculate to gain from price movements. There is nothing wrong here, but speculation fit more for the trader than the investor. When the stock markets tanked on January 21 and 22, there was panic. Those who lost the most were speculators whose number had grown phenomenally. January 8 witnessed speculative activity by high net worth individuals and retail investors crescendo. Volumes worth Rs 16,000 crore were recorded on the exchanges on that day. The average volume a year ago was Rs 5,000 crore.
Speculate not
Wealth amounting to Rs 6.67 lakh crore was wiped out on Black Monday. The retail and HNI investors had a large share of this wipe-out. In an interesting observation, a wealth manager points out that the people who speculated lost the most, as they had to pay up for margin calls and offload scrips at huge losses. Investors, who have a longer-term commitment, did not as the market quickly revived. Such investors usually do not lose significant amount of monies, he says. This is what investment gurus have propounded over the years.
Speaking on condition of anonymity, a fund manager at a large mutual fund said that the speculation ?bug? had bit a lot of people and many were willing to borrow from traditional and non-traditional sources to play the market. In case you are one of them, it is time to be careful.
?There is money to be made in speculation. I generally keep a small portion of the gains that I made last year for such activities. And I do not go for a larger exposure, even if I have enough conviction of a trading gain,” says Raghavendra Rao, a businessman from Mumbai, who lost some money in the meltdown, but is not perturbed. The point is speculation requires discipline. ?I don?t use my wealth portfolio for speculative activity, I don?t touch it at all,? he adds.
Quit not
Moreover, the year ahead is expected to see a rise in volatility. While most of the experts (read box: House views alongside) reckon that the India story is intact. While there would be some impact of the US slowdown on the economy and the market, it will not have a huge dent in the gains.
The returns from the market might not be as grand as in the past few years, and investors with a long-term view, over a year and beyond, will stand to gain. It is certainly not the time to quit the market. There are likely to be more such shakes. It is common for markets to demonstrate such volatile swings when they are at their all time peaks.
?I have been advising my clients to build up a strong equity portfolio and not change allocations,? says Amit Sarup, head of wealth management at Religare Securities. There would be a case for a portfolio reset, which is changing the composition of the sectors and stocks within the portfolio, but not for shunning equity, he adds.
Build a moat
Wealth managers are now seriously advising building a moat around the equity portfolio by adding defensive stocks to them. There are sectors like fast moving consumer goods (FMCG), pharmaceuticals and some key diversified companies that have a steady business profile. ?Even if there is a recession in the US, there will be people who would require toothpastes and soaps. People would need medicine as well,? says the fund manager.
They might not be reporting high flying numbers, but have steady earning streams and will continue to provide steady returns. One could look at low beta stocks here. These are the stocks that do not join the wild gyrations of the market.
?Now, the extent of defence in your portfolio needs to be managed. This should be matched with your risk appetite,? says Rakesh Mehta, a financial planner. The opportunity for growth still exists and there should be enough space to capture it, he adds.
Investment experts assert the need to have a clear eye on earnings visibility. A lot of companies that took a hit were those which had huge earnings estimates and forecasts, and little to show on the books. Such stocks are bound to get hammered sooner or later, they reckon. Many of these stocks had run up due to widespread speculation and also due to excess liquidity.
The liquidity numbers are likely to be tempered down as well. While there would be significant flows, there is also huge supply of new issuances that would create a balance. There are quality initial public offers (IPOs) waiting to tap the market, which will broaden the market in the long run and will attract more investors. In the short run, they will have an impact on the liquidity as was seen recently.
After a long run of growth, this could be the silent period that experts talk about. Indian corporates, especially those in the manufacturing sector, are running at near optimal capacities.
The new capacity expansion is slated to happen in FY09 and FY10 and this will spur another growth cycle. Till then it would be pragmatic to expect some turbulence and not lose faith.