| An electronic board at a Mumbai railway station displays the sensex crossing 8000 on Thursday. (Reuters)
Calcutta, Sept. 11: Someone once said: “You know it is the time to get out when the local panwalla starts talking about the stock market.”
It is that time once more. The sensex has crossed the 8000-mark and the man on the street is once again thinking of returning to the market.
The retail investor is like a moth: attracted to the flame when it glows brightest. They have done this in the past and badly burnt their hands ' most notably during the securities scam in 1992 and again in 2000; they vowed never to return. But the rollercoaster ride is too hard to resist and no one ever made money by simply sitting on their hands.
“It is most dangerous when investors want to enter the market because they feel they have missed the bus and would do anything to jump on to a crowded one, just to fall flat on their faces,” said an investment guru.
Sebi chairman M. Damodaran recently said: “Savvy investors who have the best interest of the markets at heart should assume the responsibility at this juncture to explain the fundamentals of stock market and its functioning to those people who are entering the market for the first time.”
“We have had disasters more than once in the Indian markets, we can do without them again,” he added.
The question uppermost in everyone’s mind now: is it going to be the same this time round too' Is this market going to burn us once more' Let’s try and answer a few such questions.
Should we enter the market at these levels'
It is not easy to answer this deceptively simple question. Market gurus all over the world have always maintained that it is impossible to time the market and, thus, it is futile to try and do so.
Entry into the stock market should not be based on the market’s best-known indices (such as the sensex). Do not attempt to enter the market if you are just out to make a fast buck while the market is red hot. You are sure to fall for some misleading stock tip.
The biggest question on your mind should not be when to move into the market; rather it should be to decide how long you intend to stay in there. If you had entered the stock market 10 years ago and had stayed invested till today, you would have been a millionaire many times over, never mind the scams that rocked the market.
But most investors scurry out of the market when the indices tumble because they have no appetite for risks and return only when the market rebounds, thereby losing the gains of a recovery.
However, a word of caution: you should no longer expect phenomenal returns.
Am I too late'
First time investors always get uptight about a lost opportunity and take the plunge. If you have waited for so long, you might as well wait for a little longer and learn the fundamentals about the stock market and how it functions.
Systematic and regular investment should keep you isolated from the vagaries of the market.
What should we keep in mind'
When the market soared past 8000 last week, finance minister P. Chidambaram had a word of caution for retail investors: "Take informed decisions."Understand the significance of the current market levels, keep track of all the information available, pay attention to cautionary statements made by the leaders of various institutions, try and talk to people whom you trust and are already investing in the market.
Should we buy the stocks that the brokers suggest'
Do not get carried away by individuals pushing you to buy this stock or that without asking why you should buy them. Brokers will often tell you that “the price of this stock will double” without telling you why. That’s when you need to exercise the greatest caution. Ask why.
How should we decide when to get out'
Investments in stock market should be based on expected and targeted returns. You cannot expect similar returns from each and every stock you purchase. When you purchase a stock, you should set a time frame and the target price you want from the stock and should more or less stick to it. However, since stock prices are dynamic, you might get further relevant information which might be compelling enough to hold on to the stock. In such a case, you can revisit your target price and holding period. But, whatever, do not forget to make a continuous review of your portfolio.
How do stock prices move'
The stock price movements depend on various small and large factors, including the company, its management, its past and expected performance, and future plans and growth prospects. It also depends on the sector the company operates in, the state of the economy and the market, the interest of investors in the stock (representing liquidity) and other factors. But the most important is that the price does not always correctly represent the value of the stock. Therefore, many stocks might be overvalued or undervalued. It is extremely dangerous to pick up overvalued stocks as they are bound to undergo some correction sooner or later. Investors who buy into stocks at high levels are sure to lose money. Undervalued stocks are a safe bet, but it may take some time before the investor can unlock its true value. Patient investors are sure to bag their returns.
Should we take the mutual fund route'
For investors without any exposure to the equity market, it might be safer to put money in mutual funds. In such a case, you have the advantage of professional management and do not have to personally monitor the market.