Mar 6, 2006|
Markets: Sit back and ponder...
Markets have been on a roll since the start of the year, crossing various milestones along the way. Despite the blip in October 2005 when the 'Sensex express' grinded to a temporary halt, it has nevertheless crossed the magical 10,000-mark. This euphoria has led everyone, right from the so-called market pundits to the common man wanting to garner a slice of the equity pie.
However, one needs to slow down a bit and not get swept away with the tide that is the Sensex. While we do not follow the practice of taking a call on where the index is headed, we nonetheless advise investors to mull over the following points while investing in equities.
Think long-term: Investors need to follow a long-term approach while investing in equities rather than take a call on short-term price movements. Also, the fundamentals of companies should be looked into i.e. strong topline and bottomline growth, return ratios, dividend payout ratios and so on. This means that researching a company assumes paramount importance for the purpose of reaping rewards rather than following the futile exercise of timing the markets.
Sectoral diversification: There is an age-old adage, which goes something like this - "Never put all your eggs in one basket, lest you should burn your fingers." This certainly holds true in the case of investing in equities and had become even more pronounced during the tech bubble. This means that an investor should look to invest not in stocks in one particular sector but in stocks across sectors. Even in a particular sector, one can evaluate various business models and invest accordingly. Take the pharma sector for instance. One can either invest in the companies directly competing in the increasingly competitive generics space (Ranbaxy and Dr. Reddy's), or in companies following the partnership route (Cipla and Nicholas Piramal). This investment decision depends upon the future growth prospects of each of these business models as well as one's risk appetite.
Good management: We believe that a good management team goes a long way in providing the right direction to a company, even though attributing a value (read number) to the same is difficult. Having said that, adversity really tests the mettle of the 'top brass'. A case in point is that of Dr. Reddy's. It is a well-documented fact that the company faced a terrible FY05. However, the steps taken by the company to counter the same shows vision on the part of the management. To put things into perspective, Dr. Reddy's did not curb its high R&D expenditure just because things took a turn for the worse. Instead, it came out with a novel concept of roping in venture funds to finance its R&D program, improve its margins and at the same time, capitalise on any potential upside in the event of commercialisation of any of its NCE assets. This is line with the company's long-term vision of being a discovery-led global pharma company.
Valuations: While the growth prospects of a company may look good, valuations also have to justify the same. Currently, the Sensex is trading at a price-to-earnings (P/E) multiple of around 19 times its trailing 12-months' earnings, which is by no means cheap. Having said that, even at these levels, there are stocks with good earnings prospects with relatively cheaper valuations. The trick lies in identifying the same.
Summing it all up...
While equities continue to remain a highly rewarding asset class, investors need to practice caution and not invest in stocks just because every Tom, Dick and Harry is doing so. At the end of the day, every investor has a different profile and risk appetite, and one needs to accept this fact and follow a disciplined approach rather than have a herd mentality.
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