Bull markets happen once in several years. The most recent one was in 2008. We have had a four year bear market play out. Investors have gradually lost faith in equity and preferred to place greater faith in other asset classes. Debt, gold and real estate have been the preferred investment choice of equity wary investors. Interestingly, many investors have moved monies out of equities into these assets at every available opportunity. The loss averse investors have stuck to whatever equity they own hoping these will recoup capital with time. Hardly anyone has seriously entertained the thought of investing fresh sums of money into equities. The bitter experiences of the past would simply not let them revisit the option of investing in equities.
That brings out some basic questions – I will raise and answer some of them.
1. Will there not be another bull market?
You will agree that there most certainly will be one.
2. When should one invest to profit from a bull market?
One thing is for sure. You don’t profit from a bull market by buying in a bull market (which is what most investors did in 2008). Active bull market investing is in fact a sure way to lose. To profit from a bull market, one should most certainly buy in a bear market.
3. Why have investors shunned equities in a prolonged bear market?
Investors are looking the other way due to a widespread confidence deficit. The financial services industry has lost confidence in itself and does not enjoy the confidence of the investor. The overall lack of confidence remains the sole reason for investors shunning equities.
4. How can this lack of confidence hurt investors? What should they do now?
One thing is for sure. When markets rise, confidence will automatically return. Probably, the financial services industry will also get back to doing what they always do – aggressively sell equities in a bull market. But, that would only hurt investors. Investors need to build their confidence in equities in a bear market. They must gradually scale their investments as their confidence grows.
5. How can investors build their confidence in equity?
Investors must evaluate their existing equity investments with an open mind. They need to know if these investments would qualify as buys in today’s market context. After all, sectors which were most promising in 2008 have failed to deliver and are in for a period of prolonged pain. Simultaneously, investors must list the investments that look promising in the current context. Comparisons of valuation, growth prospects and visibility of performance should be done to ensure that you decide on the best choices. Importantly, you should be able to clearly assess if the valuations are attractive. Once you form that judgment, you will see your confidence grow.
6. How should an investor use his confidence effectively?
As confidence in equity grows, investors must allocate more monies to buy equities. But, the buying should not be done in a day. Money should be kept ready in liquid instruments and buying of equities must be done as the prices of equities become more attractive. The market gives several opportunities and investors must use volatility to buy good companies and funds as their prices become more attractive. Investing all your money in one-go is a strict no-no. A phased buying is very important strategic tool.
7. Are valuations attractive at current levels?
We @ Team ithought believe that valuations are looking increasingly attractive. Given that the forward multiples of the Sensex for FY13 hover around 13 at a Sensex of 17000, we feel that a further fall in the index will make it even more attractive. To compare current valuations with the last year’s bottom should be avoided for a good reason. Every year, the markets discount the next year’s earnings. As we head into a new financial year, we should use that year’s performance expectations to make valuation judgements. We feel valuations justify investment and will only get more compelling as prices fall.
Having raised and answered these seven basic questions on equity investing in the present context, I would like to emphasize the importance of having a sound investment process to ensure that capital is deployed in the right investment ideas. Importantly, the process must allocate money systematically and in a phased manner.
We @ ithought have showcased how this process works to every investor who had adopted it in 2011. We look forward to changing the investment experience of every one of you.
To profit from the next bull market, we commend that you buy in this prolonged bear market. Waiting endlessly will make you miss the opportunity to buy. A different approach is needed to buy in bear markets and profit from bull markets.
We invite you to experience change. The ithought way.