Thursday, July 10, 2008

Is it the right time to buy stocks ?



Start picking Fundamentally strong stocks

Well the great Indian stock markets continued their southward journey. Today they reached Kanyakumari but realising they have gone too far returned back to settle at Bangalore. Jokes apart, today was one more day of high drama at the dalal street with trading coming to halt within minutes of opening. The street was market with scary scenes ( or do I say pleasant stock prices for those sitting on cash !) with tickers pointing losses tuning to 10 to 20% and even worse for a majority of stocks. Well, in my post "Stock Markets- New Year, New Horizons" dated 13th january, I had mentioned that the Indian markets will see profit booking in the month of January. But then hardly could I imagine that the extent of fall will be of this magnitude and speed. I was expecting the markets to correct by around 2000 points but as I write this post the markets have already corrected by more than 4000 points on sensex. Though the trigger was FII selling , the things got worse with similar downtrend in asian counterparts and margin calls getting triggered. So what does this great fall of sensex teaches us and how should we proceed further ?

As we sow, so we Reap
Well, when the markets skyrocketed from 16000 levels to 21000 levels, the reason quoted was that there is a flood of funds in the markets and the rally was driven by liquidity. Did anyone wondered what happens when liquidity drives the markets ? Yes, all of us were surprised by the sharp upward movements of the market, but were eventually caught in the momentum euphoria and started picking stocks even though it was clicking somewhere in the mind that the price is quite high. The fundamentals were forgotten, everybody wanted to make as much money as possible without realising that even the correction can be equally or even more sharp then the upward journey. Well, the lesson is while riding the momentum, don't overlook the fundamentals.

Overcome the Greed and Fear factors
I have been advising on many occasions through my posts that one should keep on booking profits at reasonable intervals. The greed to earn few more bucks often ends in loosing the handsome profit that one could have booked. On the other hand, equally important is not to fear in times of crisis like this. If one makes a informed decision while buying into a stock, this situation will not arise. I may sound to be a preacher but this is hard fact that one should imbibe in order to avoid disappointments in times of steep falls. It would be foolish to sell at current levels as we know that eventually the markets have to cover up and move ahead. We have seen such falls in the past and the lesson learnt is that such falls are accentuated with lot of factors and hence a bounce back, sooner or later is imminent. How long can Reliance hold at 2300 levels, how long can L&T hold at 3600 levels ...? So what if the FII's sold ? Will they not reinvest the money back in India? What about billions of rupees lying accumulated with various funds ? Will they keep sitting on the cash ? Think about it ? Markets are meant to be volatile...a smart Investor is one who makes use of such volatility to improve his wealth.

Where are the markets headed ?
I don't know. If I had known for sure, I would have taken a position in Nifty futures and earned handsome money. No body knows, what one says is his guess built purely on his or her imagination and nothing else. None of the experts could have foreseen today's fall. But let us understand that in view of what has happened in last seven days, it will take time for things to settle. We may or may not see more downside from current levels, but the path to recovery would not be an easy one. So what should one do in such circumstances ? Well, take stock of your stocks. For those who are fully invested wait for the recovery to happen and by that time identify fundamentally strong stocks in your portfolio and get rid off the speculative ones as when you get better prices.

Should I but at current Levels ?
For last few days, I had a tough time explaining friends and well wishers the reason for the fall in markets and which stock to buy at current levels. One of them was quite enthusiastic about buying. When I asked what he intended to buy, he told Reliance Petroleum. I asked him why ? He told me that the stock has come down from 250 levels to 125 levels so he finds a value buy (!) in the stock. I asked him if he knows why the stock ran up from 130 levels to 250 levels , he said he didn't have any idea. I asked him if he knows that RPL is yet to commence its operations, he said no he didn't knew about it. This is one of the basic mistake one often makes while taking a decision to buy or sell a particular stock. I was not against his buying the stock, but the fact that this person doesn't know why he is buying and what he is buying makes me understand that why people burn their fingers quite frequently in the markets.

Coming back to the question whether it is the right time to buy, I would say "Yes". So what should one buy ?

Stocks to buy at current levels
Now that's a tricky question. Today was a mouth-watering day if one was looking at the stock prices to decide which one to buy. It was like a big end of season discount sale happening and you wish you could have bought a lot of stuff but your pocket is not allowing you. There was also a scene where it was difficult to decide which one to buy and which one to leave. Such a scenario is also a tricky one and one may end up buying nothing at the end of the day !

Well coming back to the topic, I would suggest that investors should remain cautious and not take things lightly. It is the time to awaken and understand that things may change from good to worse in no matter and hence one should not invest in just stocks, one should invest in a business. Think of the business you are going to invest in and not just the stock prices. understand if the business can give you a stable return in term of growth rate and whether it can withstand rough weathers. Apply your mind to know if the management has the ability to drive the company to greater heights amidst all roadblocks backed by its past performance. Understand that the sector that you are investing in has the potential in terms of providing the company a room for achieving a higher growth rate. Let's look at some fundamentally good stocks which have fallen significantly and hence offer good entry points. This is not an exhaustive list . This is just a few out of the list of stocks I track. We will discuss individual stocks in forthcoming posts.


Again, a good strategy would be to do a staggered buying so that you may get better prices for the stocks.

Wish you happy shopping !



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