With the recent fall in the stock market, this is probably the worse time to write this article as even the die hard stock investors have lost their confidence in stock markets. Don’t worry, this piece is not about what you hear quite often, “this had to happen….”, “Remember, I told you so…….”, or the ones who say, “ if you see the OCD curve with scintillating moving average coupled with dow jones index and the fed rate cut blah blah blah…..” or such confused jargon.

Remember, if you are a layman; keep thinking like a layman, a sudden gain one fine day need not make you think you are an expert. It is only thinking, acting, investing as a layman, you would be able to make better earnings.

In this recent market fall, I have serious doubts, if any investor, particularly day trader has not burnt his fingers. It is about time to discuss how to avoid, eliminate or at least minimize such losses.

So lets start; and in this example, would take the case of Reliance Industries as an example, to explain my point of view.

Reliance was hovering at about Rs 1900 levels about six months ago and it touched Rs 3200 levels before this fall. After the fall it touched Rs 2400/- before moving up again. Now what development in the company, or its intrinsic wealth creation justifies this move to Rs 3200/- or let me say, even Rs 2400/-. Even at Rs 2400 level, it is about 25% growth in 6 months or say about 50% annualized growth rate. Does this company, register this rate of growth in its annual results?

All this sudden spurt in share prices was due to too much money following too less stocks; This kind of fall happened in China too when FIIs there withdrew money. China was quick to learn from its experience and made some rules governing entering and exit of hot money and here in India we just as ourselves, will like to burn our own fingers first before waking up.

Coming back to the point; would markets come back? Or how to invest money in stock market?

Lets see some points;

Can international fund managers afford to ignore India with a market cap of $1.9 trillion and over 200 companies with a market cap of over $1billion? Would FIIs risk of further overshooting on the downside and go short/underweight at this stage, when they should be increasing their India exposure? On fears of recession, even if the US slips into a recession, only 35% of the Sensex that consists of global cyclical, IT and pharmaceuticals could see earnings downgrades while the remaining 65% of the index should benefit from the strong domestic expenditure cycle with upsides to growth from cuts in local interest rates and taxes. 

Recommended strategy for investing;

These fluctuations are there to stay. These have happened before, may be not at this magnitude, and are sure to happen again, unless laws are amended. The only unanswered question is when would it repeat, but for this question, I don’t think any body has an answer, but for sure such falls would be repeated in current scenario.

Driven by strong consumption, Industry growth has to happen and YOY earnings (average of select industries) is expected to be 27% in next three years.

Now, which other mode of investment would guarantee you this rate of growth, except probably real estate. On real estate front too, there are fears as the prices are sky rocketing, and further growth or rate of it is uncertain.

Best bet today appears to be stay invested in long term securities, avoid day trade especially on volatile sessions, keep proper mix of securities, avoid mid-caps and review sectoral allocation every six months.