Investing in equity: Primary takeaways from past decade

November 28, 2014 12:20 AM

This is an interesting phase for investors as both equity and debt are in a sweet spot...

This is an interesting phase for investors as both equity and debt are in a sweet spot. Retail inflation fell to 5.5% in October, the lowest since the inception of the new series. Even the wholesale price index-based inflation fell to a five-year low of 1.8% in October. While industrial growth picked up in September because of pre-festive production boost, much of the rebound was due to the volatile capital goods sector.

An easing of inflation and a sputtering industrial output have raised hopes of a rate cut by Reserve Bank of India at its December 2 monetary policy meet. A rate cut will allow duration funds to start generating higher returns for existing investors. The rate cut expectations have also prompted investors to put in more money in equities.

Past returns

Past instances of people striking it rich often attract people to equity. But can those sitting on the fence use past data to their advantage? Let us look at the period between April 2002 and January 2008. The 30-share Sensex moved from 3,469 to over 21,000 points during that period. This more-than-six-times growth in six years means that the Sensex has delivered an annualised return of 35%. But between April 2002 and March 2008, the Sensex moved from 3,469 to 15,644, a growth of 4.5 times. So, in two months of 2008 (February and March), the index fell 25% from the peak, but still delivered 4.5x-times returns.

So, was the journey linear, straight and smooth?

The answer lies in the movement and growth during the period. The Sensex was at 6,500 in early April 2005, which was close to 90% absolute return from the April 2002 level in three years. Between 2005 and early 2008 and the journey to 21,000 points, there were at least five occasions where the Sensex dipped between 12% and 30%.

Lessons from history

The key takeaway from the previous decade is that the return chart will not be a straight smooth line. There are several periods when the index displayed a bearish mood, which pulled the stocks down. The key, however, is stock selection and cherry picking. Take your time to decide which stock to buy and, once that decision is made, do not look at the price on a daily basis. The decision on when to sell is also equally important. Begin with the end in mind. Set ‘sell’ targets at the time of buying the stocks and revisit your targets regularly.

Current growth story

The softening of global commodity prices is a big plus for India as inflation will further fall in the coming months. Even the economic dynamics are in India’s favour, which is getting reflected in the equity returns. For the past one year, the markets have been on a roll. The Sensex has delivered 34% returns in one year and 20% and 10%, over the last three- and five-year periods, respectively.

So, have those sitting on the fence missed the rally? The answer is ‘no’. Having said this, the Sensex has not seen corrections/dips this time as it happened in the earlier period of 2003-2007. While corrections may happen, what is important is that you should look at
company-specific data points and, then, take decisions on buy/hold/sell, or even a total exit.

Market moves

The right stock selection and cherry-picking are key. Once the buying decision is made, do not look at the price on a daily basis

Set ‘sell’ targets at the time of buying the stock and revisit your targets regularly

Analyse company-specific data points and, then, take decisions on buy/hold/sell, or even a complete exit

By Brijesh Damodaran

The writer is managing partner at BellWether Advisors LLP

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