THE STOCK POWER AND INVESTMENT DILEMMAS

[Dr. Sanjiv Agarwal]

Most of the investors would now be happy, many a relieved man with stock markets rising from the ashes, when investor are able to recoup earlier  losses or book profits. Not only this, net asset values of mutual funds have also risen sharply. This rise in markets provides an opportunity to investors to redeem the investments and look for safer investment avenues. 

Clearly, the stock markets are dominated by investor sentiment. In the short-to- medium term, markets typically tend to sway between periods of dramatic euphoria and extreme pessimism, which respectively, are a reflection of greed and fear playing out. The small investor typically gets trapped in this cycle. The best way to invest in equities is to have a long term horizon, whereby the ups and downs of the market get smoothened over time.

Studies in the US have shown, time and again, that equities are the best asset class for investment over the long term. This holds true for India too. What's more, the performance of equities over the long term far outstrips any other "safe" assets class, including fixed deposits, debt instruments and gold, not to speak of beating inflation by a wide margin.

Long term should be looked upon from a 5-10 year perspective, if not more. For an economy like India, which is the second fastest in the world, with one of the most favorable demographics, the short term volatility can be comfortably smoothened away over the long term. For many investors, timing the markets is a problem. Market noise, generally generated by a hyperactive media and a slew of market experts can be a mass of contradictions, breeding indecision in the minds of the small investors.  In such a scenario, investors can look at investing through the systematic investment plan (SIP) offered by mutual funds. Investors can identify diversified equity funds with consistent 3-5 year track records and enroll into SIP for the long term.

The Indian Benchmark indices, meanwhile, have outperformed key global markets, although it remains to be seen whether corporate results in the current quarter can justify the current valuations. Moreover, as India is strongly dependent on FII inflows, any major negative global news flow in the near term can sharply pull down our markets. However, given that the India growth story remains intact, any correction should be looked upon as a buying opportunity.

With the current decade (2010-20) expected to belong to India and China, investors must leverage on the power of equities. However, the investor mindset should change, and investing should become a long term passion, although investing itself should be done dispassionately and rationally without getting affected by the market noise.

While the benchmark indices are continuously rising, (have seen highest in past three years last week) , it is but natural that investor's desire to invest in equity stocks is also rising . But all stocks are not worth investing.

BSE classifies the equity stocks into various categories viz, A, B1, B2, ST, TS and Z on the basis  of factors like market capitalization, trading volume, number of trades, profit, track record, dividend history, pattern of shareholding and other qualitative  aspects. Though the BSE sensex has rallied to an all time peak now, yet there are about 500 stocks in other than "A" category of shares which are still quoting below par, ie, below their face value. Investors are cautioned  to be away from such stocks. Such stocks are those which have poor financials or weak management or companies with not so fair track record and not so good corporate governance.  Even the stocks which have witnessed  the recent rally should be seen with suspicion rather than investors just riding the bank wagon. All weather stocks are always good to invest in.  Investors wishing to invest  now in stocks must appreciate the fact that risks are at present higher and therefore, they should better be selective, based on home work. While it is universally true that you can not time the market, shed all your fears and greed and keep some funds in your hand so that same may be invested when the right opportunity comes. In other words, don't be  fully invested, have some money at hand.

With more and more initial public offerings (IPOs) entering the primary market, investors need to be cautious, once again.  Invest only if your conscience allows. When the stock market booms, more number of IPOs hit the market. Ideally , good or bad market should not hamper a good IPO offering. In a rising market, every promoter wishes to ride the tide but as an investor, who puts in hard earned money, one should look at the credentials of investee  company.  There is a virtual  flood of IPOs now a days and the current quarter will see the highest IPO's both , in terms of numbers and amount mobilized. 

Looking back, in January - August 2010, India had 40 issues raising Rs 35500 crore whereas in September 2010 alone, 13 issues hit the market and there are 100 more IPOs lined up, as evidenced from the draft offer documents filed with SEBI. In this IPO crowd, what is actually happening is that both, good and bad IPOs are getting mixed up and it is difficult for the investor to choose.

Investors need to be careful and exercise caution, more so when market is flooded with IPOs, liquidity is ample and IPO's are heavily priced at premium. One should also not get swayed away by lure of grey market premiums. More than 50 percent of the recent IPOs are quoting below the offer price. Higher valuation leaves no or very little room for appreciation on listing or in near future. It we look at IPOs between August 2007 and August 2010, presently over 60% are quoting below the offer price which is not a healthy sign. Therefore, while investing  in an IPO, investors should act smartly and be well informed about company's project, past history,  promoter's track record, financials and projections, fundamentals, credentials and integrity of promoter, valuations and integrity of merchant bankers doing such valuation and so on. These days IPO grading also helps in taking a decision. As a prudent investor, one should also invest through ASBA (application supported by blocked amount) which is considered to be a simple, safe and smart way of investing in primary market.

Last but not the least, stay focused, have patience and invest skillfully. Don't panic, don't be excited either.  Remember, there will be more declines and newer opportunities. Invest safely and  invest wisely .