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Are you an intelligent investor? - Views on News from Equitymaster
 
 
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  • May 6, 2005

    Are you an intelligent investor?

    Is the stock market volatility giving you jitters? Or are the red marks in your portfolio giving you sleepless nights? Read this. The legendry investor, Warren Buffett once said, "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." Nevertheless, the choice of your investment will determine your comfort levels with the stock's movements.

    What we intend to highlight here is that 'investors' do not need to panic with sudden changes in the market sentiment. This is on the assumption that the investment decision is based on an analysis of the company's and the sector's fundamentals. Time and again it has been proved that strong fundamentals can amply safeguard a stock against the vagaries of the market in the long-term. The factors you need to look into are as mentioned below.

    Company fundamentals: To give you an example, let us assume that you hold SBI in your portfolio. Assuming that you had invested Rs 100 in the stock on 1st April 2005, the stock will be trading at Rs 90 today. As against this, had the investment been made in Bank of India, your investment value would have depreciated to Rs 81. This is because stocks lacking 'fundamental support' do not have the resilience to market movements. While a negative sentiment in the market can drag a fundamentally weaker stock below expectations, a relatively stronger entity can swim over the tide only to generate the desired returns over a period of time.

    Sector dynamics: Coupled with the company fundamentals, it is pertinent to look into the sector dynamics. While Rs 100 invested in the FMCG index on the 1st of April 2005 would have today appreciated to Rs 103, the same investment in the banking or IT index would generate Rs 90 and Rs 87 respectively. This is because, while the higher sales pick up, cost cutting measures and lower raw material costs in the fourth quarter has boosted the FMCG index, factors influencing the banking and IT sectors have not been so favourable. While margin pressures and treasury losses pared gains in the banking sector, below expectation guidelines for FY06 made investors wary of the software sector. Investors also need to understand factors like the demand supply scenario and the degree of dependence of the sector on particular factors like government policies and monsoons.

    External factors: Appreciation of the rupee, movement of the US interest rates, volatile oil and commodity prices and FII inflows are factors that impact the stock markets in several ways, though not in isolation. While softening commodity prices may augur well for Indian equities, as companies would benefit from lower cost of inputs, rising US interest rates and slowdown in Foreign Institutional Investors (FIIs) inflows may be the dampeners, especially since we are highly dependent on the 'foreign money' for the rise in our stock markets. Although it is most prudent for an 'intelligent investor' to take cues from the dynamics of the global economy to analyze the future prospects, factors like FII inflows should 'not' be the determining factor for investment in equities.

    Equity as an asset class is categorized in the 'high risk' category. But a thorough analysis coupled with a long-term strategy can certainly mitigate the same. Benjamin Graham in his book 'Intelligent Investor' quipped, "Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed". It is thus left to the investor's wisdom to design his trail. It is necessary for him to be 'intelligent' enough to have a random walk down Dalal Street!

     

     

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