Play safe, buy when others sell

Investors burnt their fingers badly in several scams and the precipitous crash in infotech and media stocks in 2001. There are investors still holding stocks like Global Telesystems (bought at around Rs 2,500 but quoted at around Rs 120 now), HFCL (fallen from Rs 2,000 to Rs 65) etc. “Investors often forget the first principle of stock market investment. Don’t buy a share which has gone up too fast and still attract hordes of investors. In fact, you should sell this stock in such a situation. I always advise my clients to buy shares when the prices come down and when there are good chances of appreciation. In short, buy when others sell. Investors rarely follow such basic facts… and they end up burning their fingers,” said stock dealer Pawan Dharnidharka.

Investors lost around Rs 48,000 crore in the last two weeks of May as war fears sent stocks tumbling down like a pack of cards. The BSE Sensex shed 316.76 points, or 9.20 per cent, to 3,125.73 in the last 13 trading sessions of May. The market capitalisation of stocks listed on the Bombay Stock Exchange fell by 7.78 per cent to Rs 5,68,917 crore. “One should take advantage of panic situations. But investors should know which share he is going to purchase… They should be constantly on the look-out,” said a fund manager.

Said Hemendra Kothari, chairman of DSP Merrill Lynch, “the market has already reached the bottom. War fears have already been discounted. Unless some grave situation happens, the market will not collapse.” Several market experts feel that the time has come for investors to take a close look at stock investment. If regulators like Securities and Exchange Board of India keep away riggers and other manipulators, investors will be bold enough to venture into Dalal Street.

Investors have already started showing a preference to equity investment. The best indicator is the flow of funds to equity schemes of mutual funds. In 2001, debt funds were the flavour of the season. But not any longer. With interest rates coming down and government securities market getting a strong pounding (thanks to Home Trade scam), investors are now looking at equities. “We’re expecting a major shift in investor preference from debt to equity,” said Nikhil Johri, CEO, Alliance Capital Asset Management.

“In fact, it’s already happening. We expect our equity funds to give a return of 15-20 per cent in the current year. Debt funds gave a return of 15-17 per cent last year. This year we expect only 8 per cent following the drop in interest rate rates,” he said. Alliance is optimistic about the economy as a whole,” Johri said. Many other mutual fund managers echoed a similar sentiment. A return of 15 per cent from stock investment in a year is almost double the interest rate offered by a bank on term deposit.

No doubt, the market growth is always linked to the growth of the economy. Fund managers expect the economic growth to remain strong. “Economy is expected to pick up in the next couple of months. Besides, corporate valuation is good. Monsoon is also expected to be normal,” Johri of Alliance said.

A survey conducted by the Confederation of Indian Industry has revealed that 56 per cent respondents said general business prospects will improve over the next six months, which is a ‘dramatic change’ from the previous survey findings in which only 16 per cent said prospects would get better. An overwhelming 70 per cent respondents said they were planning to increase production, while 53 per cent said they were likely to pump in more capital over the next six months.

WHERE TO PUT YOUR MONEY: This is the perennial question of retail investors: Where shall I invest? Mutual fund managers always say small retail investors should take the mutual fund route instead of directly investing in stocks. “If an investor has only Rs 10,000 to invest he should put that in bank fixed deposit. He should not dabble in stocks,” said the CEO of a leading private mutual fund.

Yet another principle one needs to follow, according to Dharnidharka, is: be careful while acting on a rumour. Dalal Street is agog with all kinds of rumours, mostly related to circular trading (deals among 3 or 4 traders), front-running (buying ahead of a big bulk trade), insider trading or plain rigging. “While Sebi insists that brokers should know their clients, I tell investors that they should know their brokers as well,” said a market expert.

A cross-section of fund managers feel that investors should closely look at the services sector, divestment sector and restructuring stories. The services sector can include hotels, telecom companies or travel-related services. There has been a major action in divestment companies. Government stocks like IPCL, IBP and Shipping Corporation had zoomed ahead of divestment. Government-owned RCF zoomed after the government announced plans for divestment. Refiners like BPCL and HPCL have also zoomed on the market.

With the economy on the growth mode, cement, FMCG (fast moving consumer goods) and retailing sector have been giving a strong performance of late. FMCG and multinational companies have been giving steady returns to investors. “What’s important is that when you buy a share, don’t buy a share which is worth only Rs 200 for Rs 400. You should wait. You’ll get a good pharma share or an MNC share. If possible, investors should also study indicators like price-earning (P/E) ratios and return on net worth (RONW),” said long-time investor R.A. Podar.

One area where several investors slip is while exiting from shares. After buying a share, don’t sit on it for decades. When the right opportunity comes, they should exit. The million dollar question is: When is the right opportunity? If you’ve made a return of 50 or 75 per cent on one share, don’t wait for 100 per cent return. Remember, investors who bought ICE stocks at sky-high levels in 2000-01 made huge losses as they failed to exit on time. But the scenario changes if a company is a consistent performer, paying good dividends and bonus shares besides a steady appreciation in the price.

In short, stock investment is not a child’s play. One needs to study, analyse, watch, listen and then act. Otherwise, there will be a big hole in your pocket.