Rising stock market is seen wrongly as the sign to enter them by first time investors
A frequent question that is coming to me these days is about how much to invest in the markets now. The reason for these queries is more to do with the recent spurt in the popular stock market indices. What most of these first time investors do not realise is that taking investment calls is rather difficult at such times. Then there are a few who started investing a year ago and are suddenly seeing the value of their investments shoot up; they are contemplating booking profits now.
The swing between the opportunity to invest in a rising market and exiting the same in the name of booking profits is a challenge. Investing in equities is not a game of luck as many tend to believe. Those who do treat it as a game of luck tend to find it very difficult when it comes to taking a decision on their investments – enter or exit. I wish there was a foolproof formula somewhere, a set of systems and rules that would put our investments on auto pilot and relieve investors of the responsibility of taking big decisions.
A lesson I have learnt in all these years by observing others, trying my own bits and spending time understanding markets in the company of two very patient and learned men—Dhirendra Kumar of Value Research and the multi-faceted Devangshu Datta is that there is no such strategy that makes it possible to win all the time: unpredictability is an essential characteristic of the market. Yet, the quest for an entry and exit strategy when it comes to investments continues to be a highly debated and often discussed topic.
Price and value
When it comes to investing in stocks or equity mutual funds, the first point to consider is to distinguish between a good and a bad stock and fund. Suppose you do get to figure a good pick, the next factor that comes into play is the price to consider investing. For many of us, the entry point based on our view alone is tough, especially if we are unable to validate the asking price to what we feel is the right price. A typical investor’s procrastination behaviour sets in, resulting in them missing out on the opportunity to invest. One of the reasons for the delay in investing is to do with our belief that others in the markets perhaps know something about the investment, which we do not know.
This doubt creeps in equally high at the time of making an exit from an investment. It goes up multiple notches when the market falls, because many amongst us accept the cut your losses philosophy, but find it difficult to practice. Our emotions take over and we start believing that the price will correct and go up. The swing between greed and fear is undesirable and is something that impacts our ability to invest without being emotional about the investment.
One of the reasons to invest in a good mutual fund is to do away with the emotional interference and let the experts handle your investments. For instance, if one had invested only in the Sensex, since its inception—one would have on an average made about 16-17 per cent annual returns. Now, think if you were to time the investment or exit it would you have made such a consistent long-term return? Chances are more that you would have exited the investment itself than stay put the whole long period.
Today, there are exchange traded funds (ETFs) available that mimic the popular benchmark index like the S&P BSE Sensex that you could invest in. This investment is somewhat an autopilot strategy, which would keep you invested in the market through bad and good times, averaging out our costs: buying more in bear markets and less in bull markets. This is exactly what the SIP in mutual funds does.
It is not as though the SIP autopilot works at all the times. The reality is that markets tend to move randomly; the small windows of opportunity that do open up should be seen as an opportunity to exploit favourably. For instance, suppose your fund NAV goes up from Rs 10 to Rs 14 and you exit because it has gone up 40 per cent; it will be fine, if after you exit the fund’s NAV plummets. However, if the fund’s NAV shoots up to Rs 20 within a short span of your exit imagine the loss you would face because of an early exit.
When you make an investment, especially through an automatic method, say like the SIP, there are a few limitations. But, there is also the merit of being emotionally detached because it does not force you to make a decision on exiting an investment just because it has gone up a bit. When it comes to investing, the approach should be to commit the investment for a defined time frame to meet a desired goal. It is like the hare and tortoise story—the tortoise wanted to finish the race and it did whereas, the hare wanted to win and ended up losing. Be slow with investing in equities, they do not have a steady growth path—but they do grow and build wealth eventually, if you stay patient.