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Is this a good time to invest in stocks?

November 19, 2013 08:38 IST

Is this a good time to invest in stocks?

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Raghu Kumar

When it comes to financial markets, fear and greed play a large role in determining market prices, says Raghu Kumar.

During the 2008 global financial collapse, virtually every well known, large market capitalised company in India (and globally) took a massive fall in market valuation.

During calendar year 2008, we saw Reliance Industries fall by 58 per cent, State Bank of India  fall by 47.74 per cent, and both major indices of India- the S&P BSE Sensex and NSE CNX Nifty- both fall by 53 per cent.

The 2008 financial crisis transcended all industries. The current state of the Indian economy, it seems, is in an eerily similar situation. 

However, as bleak as future prospects might seem to appear, it is important to recall that the end of the 2008 financial crisis produced some of the best investment opportunities in India. 

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Photographs: Reuters

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During calendar year 2009, Reliance Industries appreciated 65.5 per cent, State Bank of India appreciated 71.87 per cent, and both the major indices appreciated 75 per cent. 

So, now we get to the question posed in the article title: 'Is It a Good Time to Invest?' Without a doubt, the answer is a resounding yes.

When it comes to financial markets, fear and greed play a large component in determining market prices. 

In today’s financial climate, the market is being driven by fear. Let’s be clear: the Sensex’s 769 point drop on 16th August (already being dubbed as “Black Friday”) and continued downwards slide over the next two days, no doubt has some basis to it. 

The government is at gripes on how to control the free fall of the Rupee. International investors, wary of the Rupee’s depreciation, are booking their profits/cutting back their losses; this in turn, has caused share prices to drop.

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Photographs: Reuters

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With such strong forces hitting the markets from all angles, panic has settled in; panic, in turn, turns to fear when the panic refuses to go away.

A good sign that the market is irrationally being bearish is when stocks across all industries slump in tandem. If you were to look at the top 50 market valued stocks on the NSE at the closing of 1st August, and compared their prices to the closing prices from 16th August, a staggering 92 per cent of the stocks depreciated in value. 

This clearly shows that stocks across all industries fell in price. At these opportune times, value investing can be a powerful tool to determine which stocks are being irrationally under-valued.

Generally speaking, large cap stocks that have been around for more than a decade are safe stocks to invest in. After all, if they have been around for more than a decade and are still maintaining high market valuations, chances are that they will get through this next chapter with a good ROI. 

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Photographs: Reuters
Tags: ROI , NSE

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Look for those stocks whose prices have fallen more than their industry peers. For example, it is evident that the banking sector has taken a more severe blow compared to other industries.

While the Nifty has fallen 10 per cent from 19th July through 19th August, the Bank Nifty Index has taken a beating and fallen a staggering 16.7 per cent during the same time period.

However, not all banking stocks should be grouped together. A savvy investor would look for opportunities to invest in a banking sector company that is financially sound, has fallen more than its industry peers, and has had no company specific news released that caused the downward spiral in prices.

Investors should implement proper risk management techniques (stop losses, profit objectives, position sizing) and look to buy and hold with at least a one year time frame.

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Photographs: Reuters

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The market will undoubtedly take some time to form a “bubble”, at which point you can look to sell your holding(s).

Remember that whenever a massive selling of shares occurs due to fear, in due time the markets stabilise, just like the markets stabilized after the 2008 financial crisis.

In conclusion, it is important to remember that the herd effect is a powerful one in the financial markets. One should not assume that prices are always accurate and that all information has been “priced” into a stock immediately. 

In times of high volatility, unpredictability, and conditions that appear abnormal - a smart investor will not hesitate to find stocks trading at a discount, do the necessary research, and invest confidently. 

Raghu Kumar is cofounder of RKSV, one of India's top broking companies.


Photographs: Reuters

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