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Ignore the market, buy ETFs regularly

columns Updated: Sep 21, 2010 23:18 IST
Gautam Chikermane
Gautam Chikermane
Hindustan Times
Highlight Story

The first time I noticed it was a few months into my first job when I began tracking the financial and equity markets. It’s been many years since, but the psychology of households who are wrongly labelled “small investors” has remained the same.

Towards the perceived peak of any market, perfectly rational people suddenly discover something called the “market” and begin to examine it in the context of their neighbours’ wealth. (Until now, the “market” was a den of speculation, satta.) By the time their neighbour tells them, the markets have doubled from their low. “Too late,” the marketing professional, the doctor, the housewife thinks. “I missed the rally.”

But the market rises relentlessly. It climbs another 15-20 per cent to touch a new high. “If I don’t get in now, I never will.” Overnight, they begin to talk a new language with a new grammar --- the India GDP growth story, market capitalisation, PE multiples, commodity cycles, foreign inflows --- reducing the complex and layered body of this money making machine to one liners they hear on TV.

Then come the orders. Buy Airtel, RCom — India is the world’s second-fastest growing market. Buy State Bank of India, ICICI Bank — they will be the first to benefit from the India growth story. Buy Tata Steel, Hindalco — commodity cycle is turning. And so on.
Towards the peak of every high — the first post-reforms Harshad Mehta-led boom in 1992, the FII-driven highs two year later in 1994, the dot-com boom of the late 1990s, the liquidity-led explosion between 2003 and 2007 and the ongoing India growth story-driven highs of today — the ‘buy’ orders from households begin to flood the market.

All caution that they practice in their everyday lives is ignored before the trading screen. In a frenzy, they buy the fashion statement of the day — mini steel and small cement plants in the early 1990s; granite and ceramic stocks in the mid-1990s; technology stocks in the late 1990s; real estate in 2005-07.

Then the market enters an overvalued zone. But it doesn’t fall immediately. Retail inflows and global investors keep them up. The difference between the underlying assets — living companies — and their valuations gets larger. At some point, someone says, “market has no clothes”.

As experts begin to cash out, retail investors who bought into the market close to its peak parrot the TV: it’s a “correction”. That correction doesn’t end until their wealth has been destroyed to about 10-25 per cent of what it once was. “The market is for manipulators, I will never buy stocks again — ever,” they say as they walk out, licking their financial wounds. And then the cycle turns.

As long as households think that the market is a den for speculators, this cycle will continue. In fact, the markets are the most powerful tool for wealth creation for average households.

With a caveat: you need to get out of the buy this sell that mode and get an equity exposure through an exchange traded fund (ETF) or an index fund — mutual funds that mimic a benchmark like Sensex or Nifty.

Your strategy should be to buy some units of an ETF every month and continue buying through the highs and the lows of the market. When you cash out 10 years later to fund your child’s higher education in Singapore or 25 years later for your retirement, you will smile at having ridden the India story in the best way possible. And created serious wealth.