What to do in Todays Market

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    What to do in Today's Market

    Inflation has crossed 12 per cent. Interest rates are rising. Individuals with home loans are

    struggling to cope with the higher Equated Monthly Instalments (EMIs) and

    simultaneously deal with inflation.

    In the stock market, the bulls are constrained by concerns over the macro-economic

    scenario domestically, the grim global scenario, persistent Foreign Institutional Investor

    (FII) outflows and the possibility of another round of monetary tightening. That does not

    mean the bears have a free hand. The correction in commodities, especially crude,

    provides ample a mmunition for the bulls to conduct a short-term rally.

    Investors who flocked to gold as the 'safe asset' were disappointed at the way the price

    dropped in August. Real estate rates too have dropped and by all indications will continue

    to fall. No asset seems to be a safe haven anymore.

    The only asset that beckons is debt with interest rates rising. But would it make sense for

    an investor to move into debt? While this is a good time to reassess one's portfolio, it

    would not be wise to simply rush to income funds, Fixed Maturity Plans (FMPs) or fixeddeposits. Read on to figure out how to make the best in such a bleak market environment.

    Don't let mar ket conditions determine you r asset allocation

    Unfortunately, for most investors, it is often the bull or bear run that will determine their

    preference for a particular asset. During a bull run, they will all flock to equities and when

    the market crashes, everyone is suddenly paralyzed by market uncertainty and fear. Which

    is really ironical, since the risk of losing money at 13,000 is much less than when the

    Sensex is at 20,000. In 2002, when the Sensex was around 3,200 levels, inflows into

    equity mutual funds were Rs 4,517 crore. In 2007, when the Sensex was in the range of

    14,000 to 20,000, inflows into equity mutual funds totalled Rs 1,07,189 crore.* Investors

    were far more willing to buy equities at higher rather than lower prices!

    Right now, when stocks are getting whipsawed and interest rates appear seductive, the

    instinctive reaction is to run to a safer haven. But abandoning equities now and moving to

    debt and cash would be a mistake. Those who under invest in stocks are left flat-footed

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    when the market recovers. And equities, as an asset, must have a place in your portfolio.

    Irrespective of the state the market is in.

    In fact, if your equity holdings have been beaten down substantially, then you could make

    some refinements to your portfolio. Check to see by how much your portfolio has deviated

    from your predetermined allocation. If your equity allocation has fallen substantially, youshould focus on increasing it. Stay focussed on your strategy. Not on the market.

    Now is a good time to consider equ ity

    It would be wise to look at the experience of renowned investor, the late Sir John

    Templeton. His investing mantra was simple: Buy at the point of maximum pessimism. In

    other words, as an investor, he relished adversity.

    A typical buy-and-hold investor, Templeton identified stocks that were trading below what

    he estimated to be their actual worth. He then was prepared to wait till the market

    recognised the value of the stock and the price corrected. In reality, it is always the

    opposite that takes place. As the market peaks, almost anything is touted as a "can't miss"

    investment or fund. Consequently, traditional measures of an asset's worth go by the

    wayside. Instead of running to the hills, investors run in droves to the market. They buy

    for no other reason than the belief that the investment would go up. When the market

    tumbles, as it did this year, investors run to debt or hold cash.

    The late Shelby Cullom Davis, a New York investment banker, former U.S. ambassador to

    Switzerland and well known value investor, once said, "You make most of your moneyduring a bear market; you just don't realise it at the time." Wise words for an investor to

    keep in mind!

    Not every beaten down stock or sector is worth buying

    In the phenomenal bull run over the past few years, risk has almost been an afterthought

    as investors plunged headlong into growth stocks and took heavy sector bets. Now the

    winning formula is probably a more conservative mix that's mindful of heightened

    volatility. Investors would do well to gravitate towards large and stable companies that

    have a better chance of weathering a market storm.

    But of course, that does not mean there aren't any great stocks in smaller market caps.

    What we are saying is that nothing will substitute smart, bottom-up stock selection.

    Ditto for sectors. Between January 8 and July 15, 2008, the sectors that got hammered

    were real estate, construction, power, capital goods and banking. But that does mean you

    should run away from them. Neither does it indicate that you should mindless shop for

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    stocks within these sectors. Only if you find good undervalued picks, go ahead and buy

    them.

    But, if you have not done your homework on investing in a stock, you should not be

    investing in it.

    And, don't just dump your fund if it has performed miserably. Check its performance

    regularly with its peers. Keep track of the portfolio to see if the fund manager is making

    any significant changes.

    Don't try to time the mar ket

    It's difficult to predict when a bull run will peak. By the same measure, it is impossible to

    call the bottom. All bull and bear markets will exhibit periods that look like reversals, but

    are just momentary before the bull or bear regains control.

    There are three things you should be absolutely clear about.

    The first is that you do not know when it is "safe" to get into equity. No one knows that. No

    one knows when the bull run is ready to resume its pace.

    The second is the wrong assumption that it is alright to change your asset allocation

    guidelines as and when it pleases you, with no regard to a change in your personal

    situation but with sole reference to the market situation.

    The third is that your gut-level feel about the end being near is a good recipe for disastrous

    investment decisions.

    If you have been investing via a Systematic Investment Plan (SIP), please continue. There

    is no reason why you should stop. If you have not been investing via a SIP, please start.

    Don't try to invest lump sums when you think the market is at a low.

    The same goes for timing the cycles of other assets. When equities are down, investors

    tend to find solace in what's perceived as "safer" - recently that was gold. When the price

    fell recently, they were a dismayed lot. If you do not have a valid reason for investing in a

    particular investment or asset, stay away.

    You will be reward ed for staying cool

    It's not easy to step back for perspective when you are gasping for air as your portfolio

    value plummets. But any sensible long-term investor will tell you that bear markets are

    setting up the next bull market. They are also keenly aware that bull markets don't run

    forever.

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    So it is only natural that in a volatile market investors should expect some short-term

    losses in their portfolios. Even a great company's stock can get banged around in a tough

    market. But that does not make you a loser (though you may look like one). While the old

    "buy and hold" mantra may seem like cold comfort at times like this, rest assured that it

    has a better long-term record than market-timing.

    Once again we reiterate our earlier point. Now is a good time to get into equity and you

    will be rewarded if you have a time frame of at least three years. With the near 30 per cent

    fall in the market from January 2008, Forward P/Es have fallen sharply and are now at

    reasonable levels. India's Fwd P/E is now 14.2x (July 2008), down from 20.4x (January

    2008). Over the past 20 years (July 31, 1988 -July 31, 2008), equities, as measured by the

    Sensex, have given investors a return of 17.16 per cent per annum.* So the problem is not

    with the asset class but with the approach to equities and the investing strategy of

    individuals.

    This too shall pass!

    However bleak the scene appears, it is not here to stay forever. Bargain valuations are

    available only in such times. But the key is to understand whether "such" times are

    temporary or long lasting.

    The current bearish phase has been the result of the spike in the price of crude and steel

    and commodities. The result was inflation, higher interest rates and the worsening of the

    fiscal deficit. Over time, these issues will be resolved. But as long as fundamentals remain

    strong, we have nothing to fear. If the fundamentals deteriorate significantly, the reverse

    will take place. The structure of the economy, the strong corporate balance sheet,

    increasing household income without too much debt on their books, rising consumption

    levels, high savings rate - will ensure that the slowdown in India is not severe.

    Equities have fallen before and they will fall again. The last bull run ended in March 2000.

    The three-year bear market that followed was pushed by the tragedy of 9/11 and a

    recession. Finally, the market bottomed out in October 2002. From then on, it scaled

    impressive heights. Along the way, there have been some significant dips followed by a

    continuation of upward pressure. But in the end, companies with good fundamentals will

    weather the storms that sweep the market and the economy.

    The lesson here is straightforward. Stocks are excellent long-term investments, but

    dangerous short-term bets.

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