While investing in stocks, one needs to be aware of external risks as well
On Friday there was a sharp fall in the prices of stocks belonging to Anil Dhirubhai Ambani Group (ADAG), namely Reliance Power, Reliance Natural Resources, Reliance Infrastructure and others. On the other hand, Reliance Industries (RIL) belonging to Mukesh Ambani gained.
Reason: The Supreme Court’s verdict that was seen to be favouring RIL with regards to the dispute between Ambani brothers on the supply of gas.
POINTS TO REMEMBER
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On a different footing, the Greek crisis is also causing jitters in the market internationally as well as in India as well. Usually, these events present a good opportunity to buy fundamentally sound stocks. But understanding the full impact of these events on stocks is equally important. For instance, the overcapacity in China is likely to adversely impact related commodity stocks in the coming days.
But these are events that can seldom be predicted. Most times, investors are told to look at financial results, do quantitative analysis for purpose of indentifying value in a share.
Financial results help to look at profitability, top line growth, leverage – all numbers that reflect the company’s intrinsic value. But factors like ongoing disputes, country risk, currency risk, etc.
These factors are beyond the control of a company. But they impact the company’s valuation. As a prudent investor, it is important that you factor in these while investing in a stock. Otherwise, your wealth can get eroded in a short time.
External factors: Assessing these external factors is important as it will help you in making proper investment decision. Understanding the threats that a company faces is important. This can be achieved by proper understanding of the business model. You should try to access as much information on the company as possible. This can be done by way of looking at annual reports, going through websites, research recommendation, newspaper reports, stock analysis, etc.
If already in, what to do? At times, it is very difficult to assess impact of such factors on the market and the stocks. Due to a panic situation, many investors sell off the stock at low prices. This enables value picking of the stocks. When the management of Satyam disclosed that the accounts had been misrepresented for years, the stock plunged from near Rs 150 to 160 to nearly single digit in a span of 4 to 5 trading days.
Suppose you had exit at such low prices, you would have incurred a heavy loss. The right strategy to adopt is to wait-and-watch. At times, there is an overreaction in the market leading to selling all around. Due to higher supply, the prices get battered. In the months to come, the prices bounce back. And when there is so much action, take a decision only after analysing the situation. If you can’t do it yourself, take help from professionals. Then, make a decision to hold or sell at a particular level.
An important aspect of investing is to allocate some investment to defensive stocks in sectors like FMCG (ITC, Hindustan Unilever, Marico) or Pharma (Cipla, Aventis, Sun Pharma).
An important point to consider in today’s scenario is that we are living in a very dynamic world. A small blip or event in any country or region or events can impact stock prices adversely. Suave investors should note that investing is not putting your money and forgetting. It is making a conscious decision to invest, stay invested or to disinvest. Building financial wealth requires making proper investment decisions.
The author is a freelance writer
