Silver lining to cloud: good time to buy

It is not easy to go out and buy when the whole world, led by Armani suits, is selling. The Armanis were selling because they feared that instead of 10 per cent short term capital gains tax, they, as FIIs, will have to pay 41 per cent, squeezing the emerging market premium out of their portfolios. Finance minister Chidambaram’s late-evening, post-trading clarification of CBDT’s circular should breathe some life back into them.

Besides, many analysts fear that some of the $4.2 billion FII money that has come into the Indian market this year is really Indian money, leveraged at rising global interest rates, being re-routed. But that’s not your problem; that’s a jigsaw whose missing piece lies with the Sebi-RBI-finance ministry troika.

As a not-so-small investor, you would be concerned with two questions. One, should you sell? Two, should you buy? The answer to the former is simple: No! But the answer to the second question is not necessarily a ‘Yes’. It is ‘Yes, but.’

Understanding this ‘but’ is the key to taking an investment call. And that’s where no analysis, no information, no knowledge can help. In any bull market, analysts come in droves; newspapers, TV channels and the Internet are over-supplying information real-time; and books by Peter Lynch and on Warren Buffett abound bookshelves.

The issue is not of the mind but of guts—do you have the stomach for risk? When investing, there is no bigger risk than ‘not investing’. Once this inertia has been taken care of, choosing the vehicle becomes easy. And if that vehicle is equities—which means you are not averse to locking your investment for five years or more (you do that with bank FDs, anyway)—what you’re looking for is not how high the Sensex has risen but how low the price of a good company has fallen. The lower the better.

That’s because, the long-term India story (8-10 per cent growth) and corporate performance (the sales and net profits of 1,555 companies are up 13.7 per cent and 26.8 per cent, respectively, over the previous year’s figure) remain strong. India remains among the fastest-growing significant economies of the world.

From macroeconomics to your little portfolio, the issue today is whether the market will continue to fall or whether this blip will turn. In either case, your strategy should be to go ahead and buy. If the market turns tomorrow and returns to its previous level, for every 10 per cent fall in price, you will make 11.1 per cent gain (a 10 per cent which rises to the same level translates into a higher return, as it goes up from a lower base).

If the market falls further over the next one month, keep buying as it goes lower. And if a doomsday situation is to be imagined and the market continues to fall over the next two to three years, keep buying. Those of you who have lived through booms and busts of 1992, 1994 and 2000, would know that finally what goes down must come up.

But don’t buy just any company or fund. The onus is on you to identify the fundamentally sound, well managed winners of tomorrow. Also, there is no cause for haste—your Rs 50,000 investible surplus can be broken down into packets of Rs 10,000 to Rs 20,000 each and invested over the week or month, until the next investible surplus accrues.

More important are the do-nots. Do not speculate. Do not follow tips. Do not let the Sensex decide your strategy. Do not buy when everyone is buying. Do not sell when everyone is selling. Do not wait for the ‘bottom of the market’ because that’s a bottomless search. Essentially, identify a handful of good companies, wait for the bad news and go ahead and invest.