Year 2011 is history now – I do not wish to start this post with its reference, but the year gone by was fraught with so much of pain and uncertainty, that it has become imperative for me to formulate an essay on top 2012 resolutions for the bruised investors so as to not burn their hands in the New Year or repeat their past mistakes.
In fact, this post is for me as much as it is for readers, because this post will serve as a ready reckoner when we venture into investing in 2012.
To start with, let me share a small lesson from my experience in investing in Indian markets. Just as they say, every bull market has a new hero to ride upon; no bear market scenario is ever similar in nature to its past phase. Every new recession is plagued with a new set of reasoning and ailments.
For instance, the 1997 Asia financial crisis started with collapse of Thai baht and deepened further to spread across Asia, whereas the 2008-recession was largely on account of liquidity crunch worldwide triggered by the US recession. And, now, we’re grinding through the Euro zone sovereign debt crisis.
Hence, it is not necessary that the symptoms and ailments of any two equity bear market scenarios will resemble each other. Yet, we can always take lessons from the same, as they come with a message that will serve some or the other good cause during the times of crisis.
Five 2012 Resolutions for Investors:
Repent by investing in leveraged business
Before 2008-recession, the stock prices of corporate firms were screened based on their future business prospects and order book size. However, after witnessing the liquidity crunch, market participants felt the need to evaluate stock prices based on additional parameters such as debt equity ratio and operating cash flows amongst others.
High debt levels means that a company has been aggressive in financing its growth, which could add volatility and additional interest costs on its heads. The bet over here is that the firm expects the returns from its businesses to be superior to overall expenses. But, if this equation gets screwed up, the company gets into trouble.
Lesson: Stretch your legs according to the length of the coverlet.
Markets are never too cheap
Yes, it sounds a bit upside down, as investors usually tend to value firms based on several fundamental valuation metrics. Though, this is not to betray those genuine valuation parameters. But, how often have you bought a stock thinking that the valuation is cheap; and it took further hair-cut of another 50% from those lucrative levels?
Frankly, this had happened to me few months back. I had bought shares of few mid-cap real estate firms, such as HDIL and Indiabulls Real Estate, thinking that their valuations have stooped to rock bottom levels, after witnessing a melt-down to a tenth of their previous bull market peaks.
But, now I realize that two best stocks to buy from the real estate sector are Godrej Properties and Oberoi Realty – both of which boast of very low or negligible debt on their books.
Lesson: Never rely on valuations alone, evaluate other parameters as well.
Trust on the Management quality
It might sound a bit theoretic to say that one ought to place trust on the management quality of a firm, but the fact remains that such companies get re-rated on the bourses sooner than others, if the administration enjoys higher trust seal amongst investors and other stakeholders.
Of course, management quality alone can not work wonders; it needs to be backed with sound business prospects and optimal debt size limit as well. But, you can rest assured that once the recession is over and the market is in the recovery mode, you will regain your lost investment value in the stock price of firm with good pedigree management.
Lesson: A tree grows with firm foundation and roots.
Hear others opinions, but keep your Mind Open
Stock market is a subjective game where different analysts ought to hold divergent views. Analysts are here to predict and guide us to the way forward, but no one is certain about the future. There is no harm in hearing patiently to every other analyst on the street, but keep your mind open to various possibilities of market movement rather than relying on any particular strong opinion.
Remember, in equity markets, there is a buyer for every seller out there (of course, until there is a downside circuit) in the middle. It means that every sale trade from a pessimistic seller is seen as an opportunity by an optimistic buyer at the other end.
Lesson: Take inputs from others, but calculate your own risks!
Don’t invest for Pleasure
Lastly, don’t invest in equity markets for the sake of pleasure, or just because markets have corrected steeply. First, evaluate your needs for investing, support your investments according to your risk profile and invest with a clear plan and time horizon to see your hard earned money work for you. For instance, a person of 75 year age should not invest in stock markets even if Sensex plunges to 8000-points, based on his risk profile and future needs.
Furthermore, if you are not an informed investor, better stay away from the vagaries of investing directly into markets. There are mutual funds with various themes which operate with the mandate to provide expertise at very reasonable costs for your hard earned money.
Lesson: Do not gamble with your hard earned money.
So, do you confide to adhere to any of the above 2012 resolutions? Let me know…