During a recent visit to Mumbai I unwittingly became a target of stockmarket queries. A cab driver asked me about the market outlook, a housekeeper asked me about infrastructure stocks and so on. Interest in equities is always welcome since in our country the retail investor is underinvested in this asset. What is a matter of concern is that the retail investors’ interest tends to get heightened during sharp upswings like the current one. They typically buy near peaks only to exit in panic when the market corrects. I have always felt that they are mostly unmindful of the other side of this investing coin: the risk. The fact that you can lose money—part or whole of the principal amount and returns—is something whose sight is invariably lost in the pursuit of high returns. This is more so during the dramatic market rallies. The fact that the high returns are possible, not definite, and their chances of fruition depend on staying invested over a longer period in the market across a variety of stocks is also a truth that many are either unaware of, or end up ignoring to the great peril of their finances. People also lose sight of the fact that stock investing is a sustained activity and shouldn’t be timed, simply because it can’t be done successfully. Over the years, for this magazine, there has been no dearth of readers sharing with us their tragic stories of losing money from mistakes and misconceptions arising out of such oversights. Sons investing their mother’s retirement money, housewives secretly investing in the market in the hope of quickly increasing their small savings, the list of individual tragedies is massive with such people losing their small fortunes.
| | | | Explanations of how recovery will pan out only confuse the lay investor rather than provide vision | | | | |
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While experts always gun for regular investing, a surge in interest and investments can only be justified if one’s outlook is bullish. Now, it wasn’t very long ago that economies and stockmarkets, including ours, went into a tailspin. Since then the market has already run up by about 110 per cent since March 2009, the PE of Sensex which indicates the number of times the investor pays for earning per share, is now at a high of 18-19 times FY ‘10 earnings. Look ahead and an interest rate hardening looks imminent. This can threaten the growth rebound that we are experiencing now, not to mention the accompanying rupee appreciation and its attendant ramification on export oriented industries, especially making their exports dearer. The largest economy of the world, the US, with 9.8 per cent of the labour force unemployed, will need job creation to get back on the growth track and provide growth fillip to the world economy, which, among other things, will help India too. There isn’t too much evidence of that happening. Of course, there has been no recent reported case of bank failure in the US, which had been a regular occurrence since the outbreak of the financial crisis. Right now, stockmarket fortunes are dependent on so many global factors that it makes the picture rather complex. Retail investors are definitely not tracking all these factors before making investment decisions, especially those who are trying to make a quick buck. They can’t. They are also in august company as the world’s leading luminaries in finance and economics are equally clueless. Of course, there are plenty of theories by experts on how the economic recovery will pan out as manifested by growth curve shapes resembling English letters L, U, V, W and so on. These are only adding to the confusion rather than enhancing clarity of vision. So, what is the way forward for the lay investor? The old rules still work and need to be respected. Treat investments in equity as investments, not as a gambling game. This means getting to know about them well including the risks of losses not just the prospects of large gains before investing. Last, but not the least, avoid the temptation of taking a short-cut to riches with underresearched and ill-considered investments. Our ancient scriptures say that in darkness even a rope can seem like a snake. It is enhanced awareness that can cast the much-needed light of knowledge that is required for informed investment decisions that can enrich us.
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