The Hindu Business Line : Riding the market bull

It has been a 40 per cent ramp-up in the Sensex from the depths of 2,900 in end-April to the heights of 4,125 now — all of four months or 82 trading sessions to be precise.

Now, this is the kind of stuff that will tempt the most hard-nosed of investors, and not all of us can claim to be that.

This may, therefore, be the time to sit back with a deep breath and take a close, hard look at valuations. It is the time now to ask some difficult questions.

Has the market run up too much too soon? Are there enough justifications for the current valuations of stocks from sectors such as steel (especially the second-rung stocks), oil refining and even those of some auto component manufacturers such as Bharat Forge? If there, indeed are, then why are investors not taking delivery of these stocks for which they are placing buy orders?

Why are laggards from the "B" and "Z" groups on the BSE getting back into action? Aren't bullish-sounding comments from analysts and brokers reminiscent of the tech bubble of 2000?

In short, has the market now been taken over by speculators? A sincere attempt to find answers to these questions would lead to some troubling conclusions.

In this backdrop, here are some dos and don'ts for those committed to playing the market.

Don't let rumours drive your investment decision: Rumours always fly thick and fast in the stock market; in the kind of market prevalent now, they are all the more so.

It would be extremely dangerous to invest on anything other than confirmed news in a market that is increasingly being dominated by speculators.

Entering or exiting a stock that bit late may be better than making instant decisions based on rumours that could lead to losses.

Always take a close, hard look at the fundamental factors before committing investment.

Never join a party half-way through; you may be left with the bill: A common mistake that we all do in anticipation of quick gains is to enter a stock that has run up too much too soon. While we could get lucky with gains, chances are more that we could be saddled with the stock bought at levels that it may not touch in the near future.

The example of SAIL in the current rally is a good one. The stock more than doubled from Rs 26 to touch Rs 61 in just five trading sessions but fell back to Rs 38 in the next two.

Imagine the plight of those who had bought the stock at Rs 61 attracted by the sharp rise in such a short time.

Adjust your investment horizon to market conditions: This is something that most investors overlook. The faster the ramp-up in the market, the longer should be the investment horizon for late entrants.

For instance, it would be naïve to expect the Sensex to repeat the 40 per cent appreciation of the last four months in the next four. That would mean that the bellwether has to be at 5775 by Christmas.

Now, even Santa Claus would not promise us that! As the market moves to higher levels, any further rise would be slower and spread over a longer time.

Beware of "penny" stocks: In any bull market, long-forgotten stocks get back into action and it is not always based on fundamentals.

Presently, a number of laggards from the "B" and "Z" groups of the BSE are active trying to break past par value. It may be dangerous to invest in these without proper knowledge or guidance.

Play conservative. Set investment goals and stick to them: The best way to ensure that you make the most of the current market would be to set price goals for every stock you enter and sell it when it reaches there.

Never mind if it rises further; you have achieved your goal. Remember, greed for endless returns is the first step to peril.

Do not shy away from difficult questions: Has this stock run up too much too soon? Should I shed it right away? Is this news on which I am buying authentic or is it a rumour? These are the kind of questions that you need to keep asking yourself constantly.

Finally, there always will be those who make more money than you in the market. Remember that the moment this begins to affect you, greed is taking over. And as Lao-tse said, there is no greater disaster than greed.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Steel: From strength to strength

Tonnes by the wire

Branding irons

Steeling the thunder

Bubbly market: Toast it, but sip lightly on profits

Ten that stand out in the crowd

Stock prices: Sensing the right signals

Riding the market bull

Corporate governance — Private and public sector responses

Nifty and Sensex — Differently driven

Of short sale and proposed changes in it