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Invest safe during tough times

business Updated: Jun 10, 2008 22:37 IST

During tough times it is important to know the basis on which investments are made. One should ensure that proper value analysis is done and appropriate selection made before making the investment.

Looking at valuation
One of the first things that an investor must do is to look for the right valuation when it comes to choosing one investment over the other. This is the case in all listed investments whose prices change in the market. The valuation parameters have to be drawn up and then studied to see whether it fits the investment mould that is required.

For example, one way of looking at a stock investment is the price earnings ratio. Some investors would like to buy a stock that has low price earnings ratio. However, if the ratio is lower than the industry average then the investor needs to question the reason for it and whether it says something about the company that is not immediately visible. Similar parameters can be used to understand whether the valuation is proper to merit an investment.

Prices are relative
Just looking at prices while making an investment is not appropriate. This is because prices do not tell the whole picture and what seems like a bargain is just a relative image.

An asset that has fallen 30 per cent from the peak of pricing witnessed a few months ago might seem like a bargain when compared with the high price.

However when one looks at other parameters, this might still be worth more than what the assets or other figures seem to suggest and the investor might still end with loss on their hands.

Strong fundamentals
Any investment that the investor wants to look at needs to have strong fundamentals. As long as the price quoted is not out of tune with the fundamentals, then the investment is a good buying opportunity.

This will ensure that the investor has put his money in select routes where the situation will be better going forward. The fundamentals will provide for the investor and the gains will follow accordingly.