Fortune Street

A place where the poor become rich and the rich richer, the stock market keeps Mumbaiites hooked from sun up to sun down — be it on Dalal Street, in trains, or in homes. It’s where fortunes are made and lost within minutes, writes Parag Parikh.

india Updated: Jul 18, 2011 01:33 IST

Recently, I have noticed several things about the average Mumbai investor’s attitude towards the stock market.

For example, whenever an acquaintance introduces me as a stockbroker (a term I personally dislike) to strangers, they do not besiege me with questions about my view about the stock market and the top scrips that they should buy.

I also hear that these days, in the first class men’s compartments of suburban trains, which are good barometers of the average city investor’s appetite for playing the market, people are discussing corruption, inflation, and cricket. Of the stock market, there is very little talk.

Finally, my peers in the finance sector glumly state that their clients no longer consider the dealing rooms as their favourite haunt.

Why is this happening? Why have investors suddenly decided that there is more to life than staring at the quote screen? While I would like to think that they are, at last, understanding the virtues of long-term investing and ignoring day-to-day movements, unfortunately, that may not be entirely true.

This lack of interest is merely the effect of the markets being somnolent for the past seven-odd months.

The past 12-month period has had two very different halves. The period from June to December 2010 saw frenzied activity on the bourses, with the broad indices bounding along unabated. A large part of this run-up could be attributed to the onset of the second round of interest rate cuts by the US’s Federal Reserve.

The Federal Reserve’s efforts to stimulate the US economy launched bubbles across various assets and geographies, notably the emerging markets.

That phase saw several participants clamber onto any momentum stock in order to participate in the rally. Anyone cautioning them about stretched valuations was dismissed as a Cassandra.

At the beginning of the second half, i.e. the beginning of 2011, the good times ended rather abruptly. Several local and global factors, such as the various domestic scandals, inflation, the Euro-zone crisis, which were always present in the background, suddenly became the reasons for justifying why markets had nowhere to go but down.

Of course, the foreigners did their bit by indulging in bouts of concentrated selling in their erstwhile favourite stocks, all of which snowballed into the indices coming off from their recent highs by more than 15%. Smaller stocks have suffered steeper falls.

If investors had been rational, they ought to have been shunning stocks last December and seriously considering investing today. However, as a long-time student of behavioural finance, I know that such rational behaviour is more the exception than the rule.

But let us first put things in perspective. The current fall in the broad market is not cataclysmic by any standard. Such corrections do keep happening at regular intervals. While the factors behind this fall may appear to be monumental, similar factors have manifested themselves in different forms during earlier corrections too, and each time, our market has bounced back after absorbing the shocks.

The despondence that we see around us is normal during any corrective phase. During such times, instead of seeking magic remedies to shore up their wealth, investors are better off revisiting age-old investing principles, which have endured the test of time. Here are some of them:

n Do not try to recoup your losses by trading in the futures & options segment or trying constantly to buy and sell stocks of dubious quality.

n Make a shortlist of fundamentally strong stocks of companies with good business models that have been beaten down recently. Make a distinction between stocks that have fallen for a good reason and the ones who have suffered collateral damage for no fault of theirs.

n While stocks with strong cash flow and low debt levels should be good candidates, remember that several of these, such as the mainstream fast-moving consumer goods companies have already enjoyed a good run and therefore may not be good candidates to buy today.

n If you feel ill-equipped to choose stocks yourself outsource the job to a good mutual fund or portfolio management scheme.

n Finally, remember that everything is cyclical, and that these times too will end at some point. Until then, refrain from talking about the stock market at cocktail parties and other social gatherings.

After all, you don’t want to be branded a party pooper, do you?

( Parag Parikh is chairman of Parag Parikh Financial Advisory Services and the author of Stocks To Riches — Insight Into Investor Behaviour As Well As Value Investing and Behavioural Finance — Insights Into Indian Stock Market Realities )

First Published: Jul 18, 2011 01:31 IST