The Indian stock markets have gone through a significant correction in the past two months. From the heights of 21,800 in Jan the Sensex has come down to below 15,000 levels. Mid cap and small cap companies have seen even more steep falls in the same time period. This has induced panic amongst several segments of Investors. What should be our current strategy now?
The current fall has been triggered by a combination of factors. A combination of fears of a US recession, turmoil in the US financial markets, poor Industrial growth as shown by the Jan IIP numbers, and uncertainty over the agricultural loan waiver for banks has contributed to such a fall. The exposure of Indian financial institutions like ICICI to volatile US financial instruments have added to the selling pressure.
While each of the above reasons has been analyzed at length in the media, the primary challenge is that of liquidity. Heavy FII selling has played its part. For e.g. BSMA (Bear Sterns) sold for Rs 685 crores on Mar 17th. In such an uncertain environment there is no buying support, further reducing the liquidity.
In the past few years, whenever the markets have underperformed, they have given significant buying opportunities and there has been a strong upside. However, the combination of macro economic factors seems to be extremely negative now.
What not to do?
1. Price averaging – Do not add to companies you hold already just because they have fallen. Averaging prices does not work here.
2. Book profits – Book profits in companies where significant profits are still available.
3. Weed out speculative/momentum stocks – If your portfolio has speculative or momentum driven stocks (Reliance ADAG companies typically fall in this category), then please sell them. Even if this means taking heavy losses, cut your losses. It will avoid further pain in the long run.
4. Do not use 52 Week High/Low Prices as a reference - Please do not buy any scripts because they have fallen 40 or 50% in the last one month. Avoid comparison against early Jan 08 prices. The true value of a stock is not determined by the price fluctuation but by the intrinsic value of the company.
5. Derivatives/Day trading – Avoid derivative trading or intra day equity trading.
6. No leverage – Avoid taking loans to invest in equity.
7. Stop watching NDTV Profit/CNBC – Tracking your stocks on an hourly basis will not change their fortunes. You will also avoid a lot of noise.
Some suggestions:
1. Hold on to fundamentally strong companies in your portfolio – they will rally in the future.
2. Dividends are back in vogue – Several dividend paying companies are available cheap now – Varun Shipping, Ador Fontech, Tamil Nadu News Print etc.
3. Equity Mutual fund SIP – Take limited exposure in the equity markets through SIP schemes of established fund houses. Avoid any NFO schemes now.
4. Sectors to pick -. Agriculture commodities, FMCG, Pharma, Paper, mid cap IT are sectors where top companies should be explored. Do not rush in to buy in large amounts. Stagger your purchases.
5. Hold your nerves – If you have assessed the value of a stock and brought at a price with sufficient margin of safety, then have the nerve to hold on in the face of further losses.
Cash is king. Avoid panic and be cautious. The market is entering new territory where it is linked to international markets and players.
1 comment:
Nice advice on not to see NDTV and CNN during these times...they scream as if the world is coming to an end.
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