It is all about 'timing the market'

A large number of investors are sulking as their equity investment has yielded meager returns (in some cases negative returns) over the past over 5 years. The equity markets are yet to conquer the peaks established in 2008 (when the Sensex briefly crossed the 21000 mark and the Nifty touched the 6300 mark). Many investors who continue to hold their scrips since 2008, on the advise of market pundits that 'equity is a long term bet', have got returns which are even lower than the fixed deposit rates offered by the banks. Only those investors have made money who have churned their portfolios, keeping in view the high volatility in the markets.

For the common investor, it is a dilemma/ choice between the daily advise on the stock market given by the media (largely related to day trading) or the advise by fundamental analysts who focus on 'buy and hold' theory. Both these extreme theories are not for the common investor. It is very difficult to track the stocks on a day to day basis given the complexities of our job/ business commitments. Hence, day trading based on short term technical analysis is suited only for full time market participants. Similarly, the 'buy and hold' theory  works to the benefit of the investor when the markets are in a sustained bull run. Even investment through Mutual Funds gives reasonable returns in sustained bull markets only. 

It is in this context 'timing the market' plays an important role in getting a reasonable return from the equity market. Historically, Indian markets have delivered above 15% annualised return over the past 30 years. An equity investor should endeavour to achieve this return on his portfolio even in the medium term. This is only possible if we learn the concept of 'timing the market'. I am not advising the common investor to speculate in market and ruin his peace, but he should be able to understand the macro fundamentals of the market (like liquidity, currency fluctuations, economic factors) to ride the underlying market sentiments. Even the blue chip stocks are available at throwaway prices when the sentiment is down. Investors must learn the art of profit booking (as also loss booking if a wrong investment choice has been made). 

If we analyse the Nifty chart for the past one year from July 2012 to June 2013, Nifty has hit a low of 5032 and a high of 6230. There have been several occasions when it has moved swiftly from one extreme to another. This extreme movement of markets is measured as market volatility (VIX is an indicator of the volatility in Nifty, a VIX higher than 20 indicates higher risk in the markets). For a common investor it is advisable to book partial profits/ losses at regular intervals to sustain profitability of his portfolio. You can buy the same scrips at 20-30% discount when the markets correct. Currently, our markets have staged a smart rebound from 5570 level, on some positive announcements by the Govt. A rally to around 5900-5950 on the Nifty is anticipated, which would be a good level to book partial profits. We could witness at least a 10% correction from that level, which can be used for putting long term bets on the market.

"Market reaction to Fed statement idiotic" - I like it

This is what Samir Arora, Fund Manager, Helios Capital Management has to say, during the course of an interview to CNBC TV18. He was referring to analysts' comments on Fed Chairman's recent remarks about withdrawal of QE3. He further says: 
"I am not feeling bearish, in fact I am feeling a bit disgusted. We in the finance industry are more a bunch of overpaid, under worked people who are all really intellectually superior but have forgotten the original purpose of finance."  I can very well understand the anguish expressed by a fundamental analyst on the knee jerk reaction of the equity and bond markets world over. But that's the way markets behave, because they are driven on the back of liquidity in the system rather than market fundamentals most of the time.

Please visit my last post dated 31st May 2013, and you would know why I say this. In fact this reaction from the markets was overdue. And mind you this is only the beginning of a major correction in the markets, a rare scenario where equity, bond, and commodity markets have moved in the same direction - south wards. I had put the onus of our market movement on 3 major factors: global liquidity, India's economic woes and fluid political situation. Today's market reaction is mainly contributed to Fed statement on Global liquidity. The market is yet to take due cognizance of the other two factors.

In the days to come we could anticipate more negative reaction on India's economic woes stemming from a growing current account deficit (CAD) and a currency in free fall. FII figures in equity and bond markets have already turned negative. The political situation continues to be as grim as the flood situation in North India. I would like to re-iterate my opinion on the sudden announcement of mid-term elections pretty soon, especially after the self goal by BJP on NaMo's elevation, and its subsequent ramifications for polarization of many smaller parties under UPA. This may prompt the Govt. to go for early elections.

The markets will definitely react negatively to such developments, because they behave in an idiotic manner. But the ensuing fall in the markets would be a good opportunity to invest in equity for long term, as the risk-reward ratio would turn favourable once the markets dip below the 5500 level on Nifty and 18000 level on the Sensex. Investment in front line stocks from these sectors may prove rewarding: Oil & Gas (excluding OMCs), Pharma & Healthcare, Media & Entertainment & NBFC's (companies in race for banking licences). Await this golden opportunity to  unfold sooner than later.