Dont panic after the fall

The investors are in a state of shock with the way the market is behaving. The last few days have been quite rough for the market with huge amount of volatility. What has happened to the Indian market yesterday and today clearly shows that there is some major concern for the stock market not only for India but also for the global markets. Remember, panic selling is taking place throughout the world with most of the global indices deep in the red.

Now let us take the basic fundamental issue of the Indian stock market. Is it the end of the Bull Run for the Indian market? The answer is clearly No. We don’t see any major change in the fundamental story of the Indian economy. There could be one percentage point decline in the growth of Indian GDP numbers, but otherwise India would continue to be the second fastest growing economy in the world after China. The correction only indicates that the market is not willing to pay 21 times P/E multiple for the Indian stocks. Looking at the FY09 earnings projections, the market is trading at a forward P/E of 14 times. This is a very compelling reason for someone to buy into the Indian stock market. I am not saying that the market would surge in a hurry but senses are bound to prevail after this storm blows over and the dust settles down. In fact, those sitting on cash must buy now as this is a god sent opportunity to invest in the market. The only thing to keep in mind is that the selection of stock has to be really good. Some of the momentum counters not backed by fundamentals have taken a huge beating and I doubt that they would surge in the next round of the rally. The reason is very simple: when front line stocks are available at attractive valuations why would someone buy second rung companies? In fact, mid-cap as well as small-cap stocks would take their own sweet time to bounce back. I would suggest sticking to ‘A’ group companies where many of the stocks have taken a beating just because of the bad sentiment rather than due to any fundamental reason. My best picks in these tumultuous times are Reliance Industries Rs 2330 L&T at Rs 3530 and Bharat Bijlee at Rs 2750.

So what should be the strategy in a market like this? There would be some pain in the market for some more time. We had seen some excesses during the bull run, similarly we would see some excesses in the bear run too. The art of making money in this market is not to panic but to do exactly the opposite of what the people are doing. Buy when everyone else is selling and you would make a great killing in the next 12 months.

Second, don’t invest with a short-term horizon. Keep a long-term outlook for the scrip you have bought as there is a possibility that the good scrip you have bought may fall further for a short while.

Third, never chase the stock in this market. It does not make sense chasing stocks.

Fourth, don’t borrow to invest in the stock market. In fact, if you have already borrowed, slowly reduce your leveraged position.

Fifth, cut your losses in the junk and small-cap stocks where there were no fundamental reasons for them to surge. It’s better to lose 50-75 per cent than to lose 100 per cent as many of these stocks may not remain liquid in this kind of market.

Sixth, never panic in this market. There is no need to change your perception about the stock market. It’s there to survive and one would make good profits provided you have the patience. Don’t watch TV channels and don’t listen to the so-called experts. This would unnecessarily create panic resulting in huge losses. Just stay put. Hold your blue chip stocks as sense would return to the market sooner rather than later.

I am optimistic that equity would do well provided you have the patience and the courage to put money for the long-term. So don’t panic. Now is the time to act sensibly and hold your blue chips to fetch good returns for you. Just reduce your expectations in terms of returns and you would have the last laugh.