“Do you think I should buy now or should I wait for a little longer?” my conservative friend called to check with me on Thursday. I was curious to know the actual rationale behind waiting. Was it because he believed that stocks would fall further? Or, was it the fear of seeing his stocks falling further? Or, was he trying to pick a bottom? My friend was clear. He wanted to make sure that he didn’t invest at higher valuations. I assured him that valuations weren’t all that high. Sectors that we bought weren’t too expensive. The expensive sectors were also slowly softening. Investors must understand their investment priority right now. Valuations of large caps are trading closer or even below their long term averages.
The priority of an investor is to build his investments selectively in segments which are attractively valued. The market as a whole is hardly expensive. In fact, the recent fall in the indices has made parts of the market very attractively valued. While one could see the markets become even more attractively valued, investors must invest at different levels to ensure they are adequate invested in equity. Several investors have significantly lower exposure to equity in comparison to other asset classes. Those seeking to scale up their exposure to equity should buy every dip. Since valuations are hardly expensive, it may be a wiser option to tank up in those parts of the market which would over a period of time enjoy better valuations. The relatively expensive parts can be bought as they gradually become cheaper. “Would you like to build a really large equity exposure in equity when they sell cheap”. It was my turn to question. He readily agreed. The best time to seek scale in equity is when markets trend towards becoming cheaply valued. Scale can never be achieved in a single day. Trying to do it in a day can steeply hike an investor’s timing risk. Scale should be achieved with minimal impact of the timing risk. Even if one starts to buy a bit early, he can correct his acquisition strategy to ensure the lows are more aggressively bought into. An investor must seek scale when the markets trend lower. That is the only way to strike gold in equities.
Fear & volatility are the best friends for an astute investor.
