My Five Top Tips for Investors in 2019 - The 5 Minute WrapUp by Equitymaster
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My Five Top Tips for Investors in 2019

Dec 31, 2018

Ankit Shah, Research analyst

It's the last day of 2018...

It's time to bid adieu to an eventful year that was full of shocks and surprises, drama and turbulence, excitement and chaos in the Indian stock markets.

Before we draw the curtains on 2018 and step into 2019, let's take a moment to look back at the year gone by and see what guidance it offers equity investors in the new year.

What Will You Remember About 2018?

2018 had a promising start, riding high on the optimism of 2017.

But soon enough, the bull run began to develop some cracks...

Here are the key factors and events that adversely impacted the Indian stock markets during the year:

  1. Rising US Interest Rates

    One of the facts that I keep reminding my Insider readers is that we inhabit a highly inter-connected and interdependent global economy. Events and trends unfolding in other parts of the world have a bearing on our economy and the stock markets.

    The US being the world's largest economy as well as the most important financial market, has a major influence on the global financial markets.

    In 2018, rising interest rates in the US resulted in an exodus of capital flow back into dollar denominated assets. As a result, the US dollar strengthened against all major currencies, resulting in the emerging market currency crisis.

  2. Foreign Investor Exodus

    The Indian capital markets witnessed the worst foreign investor exodus in 2018. Foreign investors dumped equity and debt worth more than Rs 80,000 crore during the year.

  3. Crude Oil Turbulence

    In an editorial earlier this month, I'd shown how crude oil has been one of the biggest factors affecting the direction of the Indian stock markets. For most part of the year until early October, crude oil prices had been in an uptrend. India being import-dependent for its crude oil needs, high crude oil prices hurt the Indian economy in many direct and indirect ways.

    Fortunately, crude oil prices have been plunging since October, and providing the much-needed relief to the Indian markets.

  4. Rupee Tumbles

    2018 was a turbulent year for the Indian rupee as it faced multiple headwinds owing to higher crude oil prices, strengthening US dollar, as well as the foreign investor sell-off.

  5. Reintroduction of Long-Term Capital Gains Tax

    It must be recalled that long-term capital gains (LTCG) tax on stocks was scrapped in 2004-05 by then finance minister P Chidambaram.

    The year 2018 saw the reintroduction of long-term capital gains (LTCG) tax in the Union Budget 2018-19. Investors will have to pay 10% tax on gains exceeding Rs 1 lakh made from the sale of shares or equity mutual fund schemes held for over one year.

  6. Small Cap Crash

    The year 2018 was a curse for small-cap investors. The BSE Smallcap index is down 24% over the last one year. And several small-cap stocks fallen much more. Besides economic headwinds and other factors, small-cap stocks also bore the brunt of reclassification of mutual funds by the Capital Market Regulator which resulted in an outflow of funds from small-cap stocks.

  7. Frauds and Corporate Misgovernance

    The year will also be remembered for a slew of auditor resignations, frauds, and corporate governance issues at various companies. My colleagues in the research team tightened their fundamental filters which helped them stay away from stocks such as Manpasand Beverages, Vakrangee, Gitanjali Gems, PC Jeweller, Shilpi Cable, Inox Wind, and so on.

    The corporate governance issues were not limited to small-cap stocks alone. In fact, some big blue-chip names too came under the scanner - ICICI Bank, Punjab National Bank, Yes Bank, Sun Pharma, and so on.

Some of the other factors that rocked the market in 2018 were the US-China trade war tensions, the NBFC crisis, the Modi government-RBI war and the sudden resignation of RBI governor Dr Urjit Patel.

But 2018 wasn't just about bad news and bears...

The Rise of the Indian Investor

No doubt 2018 hasn't been a great year for investors. But there has been a big structural shift in how Indians allocate their savings. There has been growing acceptance of equity investments as a wealth-generating asset class.

One of the reasons why the Indian markets have stayed relatively buoyant despite the heavy sell-off by foreign investors is the flood of domestic liquidity (Read: SIPs Continue to Rise Despite Market Correction).

The Year of Unprecedented Buybacks

In 2018, we saw a flurry of share buybacks by Indian corporates.

In my premium newsletter Insider, I've guided my readers through multiple successful buyback trades including Tata Consultancy Services (TCS), Just Dial, and Larsen & Toubro (L&T).

My Five Investing Tips for 2019

Tip #1 - Do Not Take the Market for Granted

After witnessing an unbridled bull run in 2017, many market participants entered 2018 hoping that the party would continue. Unfortunately, 2018 turned out quite differently. So, my most important recommendation to you is to always respect the market and never take anything for granted.

Tip #2 - Predictions Are Only for Your Entertainment

With the turn of the calendar, there's going to be a flood of market predictions and forecasts telling you what to expect in 2019. I don't suggest you write them off completely. Listen to them. Understand the underlying logic. But don't take the predictions too seriously. Do you know anyone who accurately predicted the movement of crude oil prices, interest rates, forex rates, inflation, capital flows, economic growth in 2018? Well, there can be a few rare mavericks who get it right once in a while. But understand that the economy and financial markets are too complex and dynamic to fit inside the rectangular boxes of excel sheets.

Tip #3 - Don't Judge the Value of a Stock from Its Price Tag

When I go shopping to the mall, I often get taunted by my wife for judging the value of a good based on the price tag - If something is expensive, it must be valuable; and if something has a cheap price tag, it must be poor quality.

In the stock markets, most investors are guilty of this behaviour. When they see a stock price in an uptrend, they value it highly and are prepared to pay dearly for it. In the same way, they shun stocks that are battered in a bear market.

The problem with this behaviour is that one's focus is purely on the stock price, and not the underlying asset. So, many investors who loaded up their portfolios with market darlings of 2017, faced the wrath of the market in 2018.

When you go stock-picking for your long-term portfolio in 2019, I recommend you don't pay too much importance to whether the stock is in an uptrend or a downtrend.

Tip #4 - Don't Go All-In at the First Dip

Many investors who felt left out in 2017, and were waiting on the sidelines for stock prices to correct, jumped in to buy stocks at the start of the correction earlier this year.

Their expectation was that the previous trend would resume after they bought the first dip. But that did not happen. They failed to factor in the adverse impact of various macro headwinds. They got brutally punished because they focused more on the price correction, and not the change in the fundamentals.

The best way to invest during a market correction is to make staggered investments from time to time.

Tip #5 - Pick Value over Size and Popularity

Do you know what's common between Salman Khan's Race 3, Aamir Khan's Thugs of Hindostan, and Shah Rukh Khan's Zero?

They were all big budget movies packed with the biggest stars of Bollywood. And yet they got ruthlessly trashed at the box office in 2018.

On the other hand, some low-budget movies with less popular actors did phenomenally good business.

I believe the fate of the Bollywood industry in 2018 is fantastic lesson for investors.

Stocks that are market darlings and so-called blue-chips are not necessarily safe. Similarly, lesser known stocks or smaller companies are not inherently high-risk bets. Pick stocks for the quality of their fundamentals, not their size and popularity.

Chart of the Day

On Friday, Sensex closed at 36,077.

A year ago, on the last trading day of 2017, the Sensex had closed at 34,057.

That's a 6% gain for the Sensex in 2018.

For equities, that's not a good enough return. Your money could have done better parked in fixed deposits.

But the truth is that the Sensex is not an accurate barometer of the overall market. And hence, these returns do not reflect the returns earned by the average equity investor.

Most investors have seen their investments diminish in value during the year.

In fact, the total market value of all listed companies on the BSE declined 5% to Rs 144.1 trillion from Rs 151.7 trillion at the end of 2017.

In other words, wealth worth Rs 7.6 trillion, which is more than the market cap of Tata Consultancy Services or Reliance Industries, was wiped out during the year.

But even the inside story of the Sensex is full of extremes.

I analysed how each individual constituent of the Sensex performed in 2018.

Let me show you what I found...

The Story of Sensex 2018

Here's what I found out...

In conclusion, you can see that even with the benchmark index, the stock price swings have been wild. Owing a Sensex stock doesn't necessarily mean your downside is protected.

Happy Investing,

Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

PS: Every day the stock markets are open, Ankit Shah, one of our best analysts, carefully observes the markets, the world news and almost all the ideas we publish here at Equitymaster. He then cherry picks one investment idea - the best one - and shares it with his 'insider list'. This is an exclusive group of astute investors. Join the Insider list here.

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1 Responses to "My Five Top Tips for Investors in 2019"

Dileep Kumar

Jan 1, 2019

It is very analytical document.

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