PLAYING THE STOCK MARKET

After the debacle of the various NBFCs in Chennai, have you noticed any change in attitude towards investing in the stock market?

Yes, but irrespective of the investment, the Indian investor has a poor understanding of risk. The minute you make a high-risk investment, it means that you are willing to forego a part of your principal. My advice will be, get into these only if you are able to afford the capital. There is a rough rule of the thumb, which says, the amount of money you put in stocks should be 100 minus your age. As you become older, your capacity to withstand risk reduces. The rest should be in other assets. People who can hold stock for a long time should hold more equity.

Mutual Funds work according to the same logic as equities. Buy when everybody is selling and sell when everybody is buying. Like the world over, mutual funds are not doing too well in India at the moment.

As I said earlier, equity is for people who can hold it for a longer period. Look at equity as part of a portfolio of savings. Do not look at it from a trading point of view. An equity investment can be part of your retirement savings plan. And the best time to buy for your retirement is during a bear market. Why do people say that a bear market is bad? Why do they not panic when the market is suddenly going through the roof? The funniest aspect of the whole thing is, this is the only market, where people buy when the goods are expensive, for every other thing we look for a discount or a bargain. The best time to buy is during the bearish phase and the best time to sell is during the bullish phase. People usually do it the other way around. Why panic and sell when everybody is selling?

I would say investors the world over go by the crowd psychology...

Maybe not in the short term, but in the long term, it is the fundamentals that rule the roost. People should learn to look at the fundamentals. Do a little bit of reading; learn to study a balance sheet. If they cannot do it themselves, they should get someone else to do it for them. Another thing you have to do is plainly look around. Look out for changes in your buying pattern. Notice what is it that you are increasingly buying, what is it that your neighbours, friends and relatives are buying. If you have increasingly started using a particular branded Atta at home, if your friends are largely vouching by a particular brand of consumer appliance…it means that, that particular Company is doing well. Buy that scrip, and hold it for a long period of time.

1. I will paraphrase Peter Lynch here, “run an equity portfolio like a recurring deposit”. Which means you need a lot of patience. Set aside some money every month for your equity investment, irrespective of the state of the market. It could be a small amount. Demat has made it possible to buy even a single scrip. Now its not like you have to buy only in lots of 50 and 100. It’s a fantastic system. Works fairly well. The investor doesn’t have to keep track of everything. Just needs to know which are the good ones. And for that you have to go by the fundamentals. As long as the price makes sense its okay. Its only when people start making money and when they don’t understand how, they are in trouble.

2. Be long term. Never look at short term unless you can lose your capital.

3. Invest in sound Companies; again go by the fundamentals and common sense.

4. Never believe people when they say, this time is different. At the stock market the time is never different. The bubble almost always bursts.

If I were allowed to make a wish list, I sincerely wish we had the drip portfolio system. This system is in place in the US. Under this system, the Company invests back your dividend into the Company, you end up adding to you equity to that extent of the value of dividend. You save on the transaction costs, which is important for the small investor.

I wish Asset Management Companies start Broad Based Index Funds. Right now, we only have index  funds with narrow bases. The broad based fund captures the true picture of the growth of the economy in nominal terms. And it is usually low cost, as well as a perfect vehicle for retirement planning and saving for individual investors.

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