Nifty is at 8000 levels, GDP growth is around 5.7% and the optimism in the Indian economy is galloping. Among all these I find a couple of strong negative battles which we all will be facing in the next 6 months and we all need to take preventive steps. We all know about the Bushan steel matter hence it goes without saying that we need to do cherry picking in the bull phase of the economy. From my memories of 2003-2007 I would like to accentuate couple of areas where I find that history is one the way to repeat. Hence I would like to provide the following advice to my investor friends who are getting ready for the Historic Bull Market Rally of the Indian Equity Markets. We all know that when bully rally begins we take adrenaline based investment rush decision which is very less based on factual. Drive the investment car but not being drunk.
When bull rallies happen Midcaps and specially the small caps make a Kangaroo style jumping in prices and tends to give stupendous returns within a very short span of time. We have seen historically that small caps are the most dangerous segment of investments in equities. Companies fails in fundamentals and financials but only the price movement’s makes the investors a bee line behind these stocks. You will find among your friends and family members, a numerous numbers of investors who have burnt their fingers by investing in small caps-getting into the trap of short term lucrative returns. It is advisable to invest in large caps and quality midcaps rather getting in to trap of these small cap risky investments.
Over the last decade Indian equity markets have matured enough in terms of knowledge and understanding the basics of investments. Hence it high time that one should remain rigid in terms of going through the rules of investments in equities. Learn and apply stock valuation rules like Price to Book value, Price to earnings ratio, Sales growth, business fundamentals, promoters and share holders’ creditability etc. These things are often missed out when a bull rally happens but one must remember that once the rally gets stuck our adrenaline rush gets a break. Don’t blame the broker or the broking company. It’s the investor’s duty to take care of his investments and not to take adrenaline based investment decisions. If you don’t understand the business, don’t know anything of the company but based on meager words and price appreciation you take up the decision of investments well be ready to face the dark nights.
Greed is good but too much sweetness makes it bitter. Well I have twisted and turned the English proverbs since that’s what we tend to do while doing investments in Bull Run. The current market is already flooded with FPO, Fixed Deposits, IPO and NCD issues. In my recent interaction in some states I found that investors are stuck with investments in some NCD and Fixed Deposit where the investor’s money has gone for a wild toss. The current situations of the Indian corporate are very bad since defaults on loans are at the peak of Indian economy. In the last five years, long-term debt of 966 NSE-listed companies has simply soared, growing by about 30 per cent annually. Infrastructure, iron and steel, mining and textiles sectors had the most stalled projects and these sectors financial conditions are extremely in bad shape. Hence alternative sources of raising capital are now widely available. Investors should be very careful about picking up investments in NCD, Fixed Deposits and IPO. Once should avoid the heard of adrenaline based investment rush. Read the business, financials and credit quality of the papers being offered for subscription. In 2004-20011 we have found both sides of the Primary market where investors made millions from FPO, IPO and NCD but at the same time they burnt their double hands in the same rush. Check the credit quality of the papers and don’t opt for anything below AAA of AA+ rated by Crisil & ICRA. Read carefully the offer document which might seem like a boring task but it’s highly required since that’s the only place where you get all the details. Don’t forget the historic failures of these types of investments.
Many investors tend to act smart by taking risky calls for the short time having the mind of playing smart with the market and doing timing of the market. They always pronounce that timing of the market is key to make profits. Well these investors are the ones who once get caught in the game will never see in the market again and they cry foul even when someone is playing correctly. We should not forget that market is smarter than your intelligence level. Never do timing of the market. In this globalised inter connected equity markets its quite risky to take these market timing based calls. Avoid these death traps and invest for long term. Remember a peaceful sleep is more required than sleepless nights.
As equity markets are in the bull phase we will find that we liquidate our investments from other asset classes and invest 100% into equity so that one can become super rich within a very short span of time. This is one of the biggest blunders being committed by the investors. Asset allocation should remain intact and one should not violate the same. Rational changes are to be dropped and only objective based and age based allocation changes should be adopted. Diversifications have been the rule and that should be followed. Remember that the greed based on which you are taking the 100% plunge in direct equity investments might turn out to be 100% loss once the equity markets takes a toll. Increase your allocation but maintain the asset allocation and abide the rules of the same.
In these bull markets we find many new investors who have just joined the job and have started earnings. They have dreams in their eyes of making and building their own investments. These are the ones who are exploited most for investments. Well they should be careful about investment decisions. For them the simple rule is that what you don’t understand and you don’t have guts and faiths don’t invest. Re-validate every information and statements which leads you for investment decisions. Understand the fundamentals of investments in equities and then take the decision of investments. Park 30% of your salary in investments in equities and prefer to invest in large caps and that too in Monthly basis rather than one short. This will help you to gain confidence as well as develops a disciplined investments approach for your financial planning. In my next article I will exclusively cover this segment.
Chit funds and other lucrative offers are going to catch the markets in these bull rally and they are mostly focused towards the rural class of investments. Well avoid these traps. Enough hands have been burnt. Opt for only those investments which are recognized by SEBI. The thumb rule to remain safe in these bull rallies is that what you don’t understand and what you are not convinced don’t opt that way. Try to collect information and do cross verification about the investment options which seem to be tempting. Ask your friends and relatives and also do some research at your end while taking plunge in these options.
Remember it’s your hard earned money and you must be aware about its investments. If you are not careful now and acting blindly be ready to pay the hefty premium of losses later on. Drive the investment car but not being drunk.
Global Macro Economic Researcher and Business Strategist
Master of Economics, MBA in International Business Management, ICWAI (Final)/CWM Final/Journalist