Markets : Post Jan 22, 2008.

“We're all witty. It's just that many of us think of our clever remarks a bit too late”.

After the market fall (calling it a correction will be an understatement) of January 22, a collective intelligence of market players suggested that the fall was inevitable. They all believed that the fall was just round the corner. Alas, it was a post facto analysis.
Just switch on any business / news channel and you will hear analysts, observers/ advisors discussing why markets fell so much during the period. So I would skip the WHY part here. Let us now focus on WHAT should be or shouldn’t be done next.

5 golden rules of investing post January 22, 2008:

Rule 1: Don’t average
First and foremost is ‘don’t average’. So far you have been using the fall in the market to average. And it was working in your favour as the markets were showing buoyancy. Now we are in uncertain zone and there are two likely scenarios.
First one is, MARKETS WILL RISE AGAIN, if you really believe in that why average at current levels. You will anyway recover your losses.
Second one is, MARKETS WILL FALL FURTHER, if you believe in that then it’s a wrong time to average.
To sum up, don’t average no matter what.

Rule 2: Long term calls are BAD
You have always heard people saying that take a long term call. But we should not forget to ask them, “at what price?” No one knows whether the markets are undervalued at current levels or some more pain is left (it can remain painful for many years also). It’s better to be a short term trader under given circumstances. Also don’t try to be too efficient in this market. Show some lethargy, it might save some money for you especially if you are one of those investors who tend to buy when market is going up rather than down.

Rule 3: Benchmarking
When nothing else is working in your favour try benchmarking*. You can take January 25, 2008 prices as the 52 week high prices for the coming year. The volume was lowest on that day as compared to the daily volume of last few months and BSE moved up by 1100 points. Whenever you are tempted to buy anything just check the prices as on Jan 25.
*This may go wrong in case of some of the shares but will work well in most of the cases.

Rule 4: Be selective and take a sector specific call
If US recession is inevitable, metals (except precious metals) are going to under perform as the demand will be low and capacities are very huge. Power will be weak. Cars won’t run fast. Real estate might prove to be unreal. Therefore one must take a selective call on select few shares from tech, hospitality, Engineering, Media and pharma pack.

Rule 5: Look elsewhere
One need not invest in equity market all the time. One can look at Gold ETF. Analysts believe that Gold may touch INR 15 K. This means a return of 25% from current levels. Getting a similar return from the stock markets will be difficult. Set realistic targets, invest your time (remember timing is not the only important thing) to make money. You may look at Debt instruments also if you have become a conservative investor.

A wise man once said, “Markets can remain insane for longer period than the period for which you can remain solvent”.

These rules might assist you in deciding your future course of action. Take a rational call and outperform the market.

Last but not the least, try to be slightly correct but avoid gross mistakes.

Siddharth Rahalkar
rahalkar@gmail.com



Disclaimer: Consult your investment advisor before taking any investment decision.