We can observe that our cricketers are the darlings of the masses when they win and when they lose, they are rebuked. The same thing can be said about investors’ love hate relationship with the markets. When the markets collapse everyone is running for cover. Babu Krishnamoorthy who heads Pelican Wealth Managers Pvt Ltd, warns against such wavering relationship.

 
Key points investors need to keep in mind in turbulent times

Investors need to guard against hasty decisions that may be detrimental to their interests in the long term. In turbulent times, it is important that investors revisit the basics. They need to ask themselves the following questions:  

Investments are the last step of a process, which was done by considering one’s objectives, investment horizon and one’s own temperament. Once these are fixed and investments are made based on these parameters, it is important to stick by them to reap the benefits. However, the following could be done to ensure that bad/non-performing portfolios are removed during turbulent times:

1.      Review each investment in light of the volatility and the long term prospects of that investment (esp. equity)

2.      Rebalance the allocation which may have changed on account of the turbulence in the market

In the stock market, price changes daily, but value rarely changes.
 

High risk & high gain

As a rule of thumb, risk and return go hand in hand viz., equity stocks are high risk investments and also provide high returns, where as bank deposits are low on risks also yield a lower return. While this statement is true, this strategy will only work for:

The average return of diversified mutual funds over a 15 year period would be around 20% per annum, while individual schemes in a one year horizon may have vast difference, ranging from massive loss to super profits.

However, this strategy would not succeed if the nature of investment is of bad quality, viz., high interest chit funds, plantation funds and other investment forms that were a rage a few years back, and then went bust on unsustainable promise of returns. Venture capital oriented investments are not for everyone.

Subject to a good due diligence on the investment option, higher the risk, higher the gain will work if it is adopted in moderation and in tandem to one’s financial objectives and temperament.
 

Finding that a sunrise sector and reaping gains

It is possible to find a sunrise sector and reap gains, but it is quite difficult. In 1994, Infosys was an unheard company, and IT was an unheard sector. However, a few investors who took an early position reaped the full benefits. To do such investments:

Judging the market situation and individual stocks

P/E Ratio can an important parameter for judging out the expensiveness or cheapness of the market. While an overall market view can be taken, individual stocks may be overvalued or undervalued. So P/E ratio is just one more tool to judge the market situation and not the only tool.

The most common method is to look at EPS growth over the previous year. However, there are cases where the topline has grown and the bottomline has slipped, but the valuation has been superior. Depending on the need, there are various methods used to find out the growth rate of a company.

Stock markets although volatile in the short term, tend to follow economic indicators and corporate performance in the long run, so if the economy and corporate results continue to grow at 8.50% and 15% respectively, we believe that in 6 years the Sensex can touch anywhere close to 39,000 points. But range of 35,000 to 40,000, would be a reasonable estimate considering the present Sensex value of 17,000 growing @ 15% per annum over 6 years.
 

Futures and Options

Futures and Options (F&O) are basically hedging tools that enable investors to leverage their existing investments to generate a profit or protect a loss. However, over the last few years, F&O has emerged has a separate investment option mainly for speculators. Few of them have won fantastic returns, while the masses have lost their long term savings. So it is obvious that stock trading is relatively less risky option.

- Babu Krishnamoorthy

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