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Do's and don'ts for small investors
Salil Panchal / Morpheus Inc. in Mumbai
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September 12, 2005 11:58 IST

With the stock markets at historic record highs, there is speculation, uncertainty and a bit of optimism about which way the markets will move from here.

We took a dipstick opinion of the best in the business and believe that this stage investors should err on the side of caution (at least until the markets find a clearer direction). We present a list of do's and don't which retail investors should keep in mind and adopt to maximise profits and minimise losses (and not be too stressed going about it).

Several theories are floating around regarding which way the markets would move, and therefore it is critical to use one's own judgement in most cases.

Do's for investors

1. Stay invested, possibly continue to invest more

It is natural to book profits with the markets at higher levels. This should be done, but we suggest people should also stay invested in the equity markets. Indian stocks do not appear overstretched at present, considering that average price/earnings ratios -- a common measure of value -- were around 15-16 times.

These are considered "permissible" levels, if we compare it to previous levels when the markets crossed historic highs. We expect the next quarter corporate earnings to be strong. There appears to be an upside to the markets at this stage, however limited, over the short-term.

2. Know your risk

It is critical to understand where you stand and where you want to be. What level and amount of investment are you comfortable with, regardless of what market experts tell you? Therefore, take some time to evaluate your risk-bearing capacity. This is a golden rule that should be applied at almost all times.

3. Play safe, invest in a mutual fund

For those who are still not sure about their research, we suggest you invest through a mutual fund. The advantages would be the risks would be minimized and you would stay invested for a longer-term in equities.

4. Encash on dips

We reiterate it is important to bring some money home, when you have made profits in earlier times. We expect a correction to take place, which could be in the range of 300-500 points. Considering that you would stay invested in equities, we advise that you encash at each dip of the Sensex. The short-term trend will be stock specific.

5. Diversify even more

At these record levels, there will be certain amount of risks. We suggest you diversify a bit, looking at stocks, mutual funds, commodities and gold (for a longer-term). If equities are your favourite, we expect you would be able to pick up some of these stocks again.

Don'ts for investors

1. Don't commit large amounts of money

Even if you have a strong risk-bearing capacity, we suggest you do not commit large sums of money at this stage. A sharper correction would just leave you bleeding more.

2. Stay away from experts

There are a large number of so-called experts floating all around. Stay away from them. Your broker, neighbour, cousin or business journalist friend may suggest surefire picks. Success may not come as fast, as we are in unchartered territory. Use your own judgement.

3. Don't trade for short-term

In line with the stay-invested mantra, do not be completely target oriented. 8,000 or 9,000 are not sacrosanct levels. It is more important to be stock-specific, keeping an internal value for the stock.

4. Look at stock fundamentals

While doing your research, attempt to understand which the company is and what it does. Value picking may score above growth picking at this stage.  Do not be tempted to buy penny or mid-sized stocks at this stage, envisaging a huge windfall. We suggest otherwise.

Considering that the markets have already run up so fast, the mid-cap segment may just lose steam over the short-term.

Morpheus Incorporated is an independent investment intelligence services firm based in Mumbai. It provides investment advisory services and specializes in technical analysis products, stock markets training modules, derivatives trading strategies and financial news analysis.
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