Two years ago on Moorat Day, 3rd Nov 2013, the Nifty hit an intraday high of 6343 – which was then an all-time high. This was a stunning 24% rise from its low of 5119 reached less than three months earlier (28th August 2013) on fears of India’s worsening current account deficit and the now-famous ‘Taper Tantrum’. Since Moorat Day 2013, the Nifty hit its lifetime high of 9,119 (intraday) earlier this year in March 2015 and since then has fallen lower. With another Samvat now upon us, the key question in investor’s minds is what next?
While markets hardly take direction from an auspicious occasion, the festive spirit is a good time for introspection. More so for retail investors who have invested in equities in droves in 2015. As reported in Business Standard, FY16 could see record-breaking inflows by mutual funds, given that in the first half alone, Rs. 50,000crores has been invested – compared to the earlier high of Rs. 40,722crores in FY15. In fact, the overall net investment so far in FY16 is more than the cumulative investment during the entire previous bull-run, between FY04 and FY08.
If you’ve missed out on this rally and this surge into Indian equities, it is never too late. In fact, you have time on your side. As I had mentioned in an earlier post, 10yr, 15yr and 20yr returns on the Sensex are all running below average. But before you get carried away by promises of making millions in the markets, here are few points for you to ponder on:
1. Can you take a loss?
It’s easy to say that you are willing to take losses. But as Mike Tyson famously said, “Everybody has a plan until they get punched in the mouth”. Losses hurt. There is enough behavioral finance study to prove that losses are twice as powerful, psychologically, as gains. So ask yourself this – can you really take losses? Stock markets are inherently unpredictable. While making a big profit feels great, taking a big loss can be crippling mentally. What matters is how soon you learn your lesson and move on. This ability to stay invested and focus on priorities will define your approach towards investing in equities. There is no winning formula in the stock markets. Traders and investors alike make losses and profits. Therefore, understand your risk-return philosophy and how comfortable are you with taking a loss.
2. Can you be patient?
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No one can predict the Sensex – short term or long term. As mentioned in the opening para, the Sensex rose by a wild 24% in less than three months. Over the longer term, however, there is simply more time for the Sensex to respond to macro-economic factors. Hence, if the economy grows, then the Sensex should also grow in tandem. Sure enough, the Sensex has always delivered positive returns (i.e. – no losses) for investments of more than 10, 15 and 20years. Thus, by waiting it out, you improve the chances of making a profit. However, do you have the patience to wait that long? Are you comfortable with not selling your stocks or redeeming your funds for a long period of time? Can you take market panic and crashes? This patience will hold you in good stead because 10years is a really long period of time.
3. Can you adjust to noise?
Unlike any other investment, the noise around the Sensex is really high and you cannot escape it. It’s on the TV, on the Internet, in the newspapers, in topics of conversation. The stock market is open from 9am to 3.30pm every working day and prices change by the minute. Stock prices react every second to news on companies and the economy. If you are a trader you have to be constantly alert to these moves. You have to be wired in to your trading system tracking minute-to-minute prices. If you are a long-term investor, obviously you will not face these day-to-day pressures. But, every once in a while, you will need to assess the performance of your portfolio versus your objectives. Thus, adapting to this noise is also an essential part of the equities framework.
Finally, whether you invest directly in equities or hire a professional financial advisor, the funds involved are your own. The festival season is as good a time as any to take a look at equities as an avenue for growing your hard-earned money. So, here’s wishing you a very Happy Diwali, a Happy New Year and prosperity for your investments!
Anupam Gupta is a Chartered Accountant and has worked in Institutional Equity Research since 2000, first as an analyst and now as a consultant.
He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons.
He tweets as @b50