Markets: Where to from here? - Views on News from Equitymaster

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Markets: Where to from here?

Nov 20, 2006

Whenever, as equity analyst, we meet an individual (forget whether he is/was a friend), the first question we are faced with is what is your view on the market? Will it touch 14,000 this time around? Yes, it is our job to analyze market and let investors know what could happen based on analytical reasons. But is it possible that every time we should have view? Some times, it so happens that even the best in the industry 'just' do not have a view on the market! We know of many 'experts' who are totally surprised at the way the Indian stock markets have gained in the last three years and even astonished at the kind of bounce back in the last six months. It is better to say 'no view' as compared to saying 'the days of equity broking in India are over' in 2003 (this was by the head of a reputed domestic brokerage house).

Some 'experts' are even smarter! Some 'market bites' that we have come across over a period of time are:

  1. The most common of them are 'We do not know where the index is heading in the near term, but the long-term prospects are good'. Forget the fact that the definition of long-term is ambiguous in the stock market circles. For some, it is one year and for a trader, it could be 'as much as' three months! It is up to the investor to understand what he means by long-term and if he/she is successful at that, may be, he will make money.

  2. "From here, markets can either go up or come down", said an expert in a business channel before one year or so. Truly commendable!

  3. Some talk of resistance and support levels based on historical charts that are anyways history! Forget the fact that the Indian markets are at unprecedented levels now.

  4. Some have even resorted to numerology and star signs (as was carried in few business/personal finance magazines) to predict stock market movements.

  5. Some are philosophical to conclude that 'markets are what they are - neither correct nor wrong - lets accept the way they are'. This is probably the response to the general view that 'markets are always right'.

  6. Some even cite the famous quote by John Maynard Keynes 'In the long term, all are dead'.

Given this backdrop, in which category do we fall? As a regular Equitymaster visitor, one is very likely to have come across views like

  1. Equities, as one of the asset classes, are risky.

  2. Stock market is not a casino to conclude that 'if it strikes, it strikes big time'.

  3. Invest in fundamentally strong companies with a long-term view. Fundamentals i.e. business that have seen atleast one economic cycle, solid track record (outperformed the sector in an upturn and in a downturn), stable cash flows and more importantly, credible management at the helm.

While there are enough statistical evidences to prove that the first two points are true, it does get tricky to identify businesses/companies that have such a track record. Even if they have the track record, it is not a guarantee that it will sustain or even if it sustains, how will a retail investor be able to identify such companies successfully. Here is where the golden rule of equity investing comes into play i.e. diversification. Do not put all your eggs in one basket (the term 'one basket' could be both over investing in very few stocks or only investing in equities).

By investing and managing across a broader, but a nimble portfolio, which manufacturers/sells products that you can associate with (from soaps to sugar and not genetic engineering), one is more likely to minimize risks. And more importantly, when it comes to assessing one's portfolio performance, it does not matter what your friend made from his equity investment or how much you could have made by investing in 'that stock' instead of 'this stock'. At the end of the day, the portfolio should be geared to meet your financial needs. Period. If you are unable to dedicate time to generate such returns, it is time to consult a personal finance advisor whose objective is not just his commission, but also your needs.

If one follows such basic discipline, it does not matter what the level of index sixth months down the line is going to be. And surely, it does not matter what our view on the stock market is now!

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