Jun 18, 2004|
Are you trying to time the markets?
One of the most popular myths in stock market investing is that in order to generate superior returns over time, one should be able to predict the stock market movements. In other words, one should invest when the markets are at their lows and sell when they are at peak. However, nothing could be further from the truth. It is almost impossible to gauge stock market movements on a consistent basis. Even the best of investors, armed with the most sophisticated tools, have failed to do so. Therefore it comes as no surprise when an ordinary retail investor tries to take advantage of the market movements but more often than not, ends up losing his hard earned money.
* adjusted for dividend and stock splits
In the table above, we have made an attempt to justify our stand of investing in a company with strong fundamentals and attractive valuations irrespective of where the markets are poised. To make our case stronger, we have chosen the day of investment as the day on which the Sensex was ruling at levels similar to what is being witnessed currently i.e. close to the 4900 mark during the month of August in the Year 1999, thus resulting in an investment horizon of around 5 years.
As is evident from the table above, while the Sensex has hardly budged (point-to-point) for an investor who bought then and sold now, despite two peaks of over 6,000 levels, there were certain stocks whose returns on a CAGR basis far exceeded than that given by any competing financial instrument. These were the companies that logged in healthy growth in their earnings year after year on a consistent basis. Quite unlike their peers, they moved ahead in terms of profitability and by way of either their strong management skills and/or leadership positions in their respective industries, and rewarded shareholders for being persistent.
While entry price points are not that important at the time of investing in fundamentally stronger companies, a check between a valuation metric such as the P/E and the future growth prospects of the company is a must. What we are trying to say is every business has a value and hence an investor should steer clear of companies whose valuations have run way ahead of their earnings potential.
It should also be remembered that this strategy is not the be all and end all of stock market investing and there have been certain companies like HLL and ITC, which have given negative returns over the same time span despite their strong fundamentals. We believe that no one can be right all the time. The important thing is to be more right than wrong!
Read Mr. Prashant Jain's (Head, Equities- HDFC Mutual fund) views on the stock markets and timing the stock markets.
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