Posted On Friday, Jul 13, 2012
The only one thing certain about the stock market movement is that it is uncertain.
Markets have never moved, nor will they ever move in a single direction. What is up will come down someday, and what is down will go up someday.
This up-down rollercoaster trend is even more evident in the case of economies which are still progressing or like the developed world calls us - Developing Nations. As a developing country, India too encounters a frequent ebb and flow of market cycles.
There seems to be a widespread theory that the Indian stock market is heavily dependent on foreign investments. While this notion is not completely incorrect, foreign investments are not the only market influencing factor that needs to be considered. It helps to note that the reason that foreign investors are keen to invest in India, is because they recognize the potential in this growing economy, and believe in India's growth story. India's current progress proves their belief to be true.
There are many reasons for this progress. However, key drivers would include the country's massive domestic consumption which is continuing to improve and low exports to countries in an economic slag. These are positive signs for a country which is at a developing stage, and these indications of potential have prompted foreign investors to invest in Indian stock markets more than a decade ago.
While foreigners reap the benefits of the Indian growth, the Indian retail masses are conspicuous by their absence. Indian investors continue to shy away from the evident opportunity of growing our own money, and remain content to stand by the sidelines and watch others enjoy creating wealth.
It is not that we would not like to create wealth ourselves, or that we do not want to invest. We are extra cautious towards the stock markets because we fail to approach it with the correct attitude. With a little guidance, this attitude could be corrected and we too could reap the benefits of the Indian growth story.
Start by understanding that stock markets are pretty similar to a rollercoaster ride. Markets go up and then without any warning suddenly going down. Some enjoy the thrill, others wonder why they got on to it.
So let's get on to this ride. First, take a look at the tracks. What do you see? Do you see them lying straight? No way, right? The tracks are all topsy-turvy, there are hikes and plunges, there are highs and lows, and there are ups and downs.
While we await our turn on the rollercoaster, you'll see different types of people waiting along. Some look at the tracks and get nervous, some are excited, and some simply too scared to get on it. Quite a few of the people are happy to stand by and wave to those who chose to get on the ride.
Another point that you must consider - Roller coaster rides are mostly for adults who can control their emotions and remain relaxed. Children on the other hand tend to get over excited or terribly nervous, and might end up doing something silly, hence they are not the ideal audience for such a ride.
You will also meet people who have finished the ride - some would be laughing and would strongly recommend that you let loose during the highs, and some would be in a pretty weary state and would in fact try and convince you to drop the idea of going ahead. Don't let the noise get inside your head, stay focused on what is it that you are looking forward to.
Now that we've finally managed to get our ticket, let's find our seats.
The first thing that you must do, before the ride takes off, is to lock the safety belt. This will ensure that when the ride has a bumpy track, you don't fall off. The safety belt will keep you going and absorb the jerks of the rollercoaster.
Stock markets too function similarly. There is a lot of speculation about whether you should invest or not, and how much should you invest, before investing in equities. Experiences, theories, tips from our associates and friends, television channels and business papers make us over excited or very apprehensive and nervous.
However, serious investors don't fall prey to such market chaos. Serious Investors don't look at the ride from outside or listen to others. When they decide to invest in equities, they get themselves a ticket, tighten the seat belt and stay invested for a long term.
Once the ride begins, it steps up slowly. And this is the time we start getting a high, especially when it picks up speed and we're almost at the top. Everyone enjoys the view from the top. But then, the descent begins, and the ride down appears even faster than the climb to the top. As the ride moves, it starts changing track, moving from the right to the left, hitting a rumbler track, and threatening to throw you off balance.
Are you wondering whether you made a right decision to get on the ride? Look around you, most of the people are having the same thoughts. Some of them will panic to the extent that they will jump off without considering the consequences of doing so. Others who didn't fasten their safety lock will most probably get thrown off during the next turn (if they have managed to survive as yet). However, this is how the ride works, and that is why only sensible people will have the thrill of enjoying the ride and earning total returns on the money invested in the ticket.
You have heard most investment managers say this, but even at the risk of sounding repetitive, I will repeat - Equities are ideal for the long run.
When you invest in the stock market, you are investing in companies. And companies take time to grow. Hence, you should ideally have a horizon of at least 5 years and in uncertain times this has to go upto a minimum of 7 years.
Patience does pay off in equities, because historically there has been no other investment option that has generated better returns for investors over long term. But yes, along with high return potential, equities carry a high risk capacity. Hence, look at your individual risk profile, before you choose to ride equities.
When you get on to the rollercoaster, you can't try and get off in the middle. Can you imagine what would happen, if you chose to leave the ride in between? Quite a dangerous proposition, right? This is exactly the case when you decide to invest in equities. Keep your patience and hold on to your seat when the ride gets bumpy.
Most of us have at some point or the other jumped off this ride, and in the bargain have hurt ourselves pretty bad. The problem was not with the ride, it was our impatience that caused us grief.
Understand that every dip is followed by a climb. The upward movement may sometimes be around the corner, sometimes may take much longer, but the climb will surely happen. Ups and downs make the rollercoaster a joyride; otherwise there'd be no thrill.
Sure, too much thrill can kill, but try understanding what causes these fluctuations. Stock markets function on the basic law of demand and supply. So the next time your investments take a dip, wait till the market reaches the same level it was at in the past, and then look at the value of your investment during both these periods. The value of an efficiently managed company or portfolio will be better than what it was at the same level sometime ago. The more such ups and downs the greater could be the opportunity.
What should you do in volatile times? Stay calm and practice self control. Your ability to remain calm will help you sail through uncertain times when the world around you would be predicting doomsday. Self control will help you resist the urge to follow the herd and will help you stick to your discipline.
Let's put some numbers to this. The table below explains those month-ends when the BSE Sensex levels were between 15,500 and 17,500 from 31-Jan-05. Below are 14 such occasions with the corresponding value of few stocks from different sectors.
(as on 30-June-12)
Now assume that you had invested in any of the above stocks on 31-May-05. Despite of all the events happening in last 7 years where BSE Sensex plunged down to the lowest of 6,655 on 2-Jun-05 and climbed up to the highest of 21,004 on 5-Nov-2010 and as on 30-Jun-12 was 17,430, the annualized returns from the given stocks in the last row are not so disappointing.
Take a close look at the above table and you will also learn that the stock prices of the companies have progressed over the years while BSE Sensex levels continue to climb up, come down and return to the level between 15,500 and 17,000.
This is what investors like us should look out for, we should focus on the value of the company's stock or portfolio and not BSE Sensex / Nifty levels.
Let me clarify that above mentioned stocks are just examples; there are many other companies which have positive growth prospects. There are prospects waiting to be identified, but it takes time we need is to give dedicated time and efforts on identifying such companies and be patient with our investment in them.
It is the ride which is meant to give us value for money, only if we value the nature, rules and potentials of this ride.
The author is a sales professional with over a decade of experience in the financial services industry. You can contact him at [email protected]
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