It’s the stocks that matter

by Vivek Kaul/Praveena Sharma/ DNA Money

“Savour the moment, worry about tomorrow, tomorrow!,” said Ramesh Damani, one of India’s most respected brokers on the Sensex touching 10,000.

The question now is, where does it go from here? Different analysts have different takes. A weekly news magazine and a Sebi member even predicted that the Sensex will touch 16,000 in the days to come.

At the same time, many experts have been of the view that a correction is long overdue. Some of them have been talking about a correction, since the Sensex first touched the 6,000-mark in January 2004. But when will the correction come? Well, your guess is as good as ours. Given this, investors should keep certain things in mind while entering the stockmarket.

If the idea is to speculate and try and ride the market, then the best way out is to earmark a certain percentage of the total investment for it. How much loss the investor should be ready to bear? If an investor can answer this question, he knows how much money he should earmark for speculation. Further, the quality of stocks is of utmost importance. “However, to be euphoric today would be foolish, because at the end of the day, what matters are the stocks that an investor owns and not the index. I am sure all those investors who had invested in penny stocks would probably be worse off today,” said Krishna Kumar Karwa, Director, Emkay Share and Stock Brokers Ltd.

Another rule that investors should keep in mind is what Benjamin Graham recommends Intelligent Investor: “We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds.” He further says “Conversely, sound procedure would call for reducing the common stock component below 50% when, in the judgment of the investor, the market level has become dangerously high”.

In short, do not stay invested only in stocks. Look at other asset classes like fixed-income instruments or bonds, real estate, gold etc. The Sensex has given a 50.80% return in the last one year. Expecting similar returns one year down the line is next to impossible. For that to happen, the Sensex will have to touch 15,000.

Looking at other asset classes, gold demand should pick up further as investors try to increase the proportion of yellow metal in their investment portfolio. “Even though the prices of precious metal is at a 25-year high, it would still be preferred by investors as it offers better liquidity, mobility and maintenance, compared to the other asset class. There will be a flight of investment from equity to gold as it is a safer bet,” says Pramit Mistry of Brics Commodities.

Bullion experts believe investors would increasingly use gold to hedge their profits against market volatility. As investors book profits in the stockmarket, property pundits predict the flow of earnings from stockmarkets into real estate.

This trend was set off when the equity market had touched 8,000 last year. Besides the high net worth individuals, institutional investors like India Bulls and Anand Rathi have also substantially invested in real estate. This has sent real estate prices soaring and will keep them there as long as there are sustained returns from the stockmarket. Last six months have seen real estate prices across India move up over 30-40%. The market has also seen some blazing pace of price rise in places like Jaipur (300%), Noida (125%) and Bandra-Kurla-Complex in Mumbai (over 200%).

On the other hand, real estate prices in Gurgaon have dipped marginally as supply outstrips demand. “From here, we are likely to see a slowdown in the rate of real estate price appreciation, if the supply of land is not interfered with,” says Pranay Vakil of Knight Frank, a property consultancy firm.

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