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This article was first published 15 years ago  » Business » Buying stocks? Some tips for you

Buying stocks? Some tips for you

By Tinesh Bhasin in Mumbai
April 13, 2009 11:58 IST
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After almost 15 months of bad news, stock markets across the world have recovered to some extent in the last one month. And both traders and investors are beginning to feel that things aren't so bad after all.   

The numbers speak for themselves. The Bombay Stock Exchange Sensitive Index, or Sensex, is up by 32.39 per cent in one month. Even the mid- and small-cap indices too have gained 31.52 and 31.43 per cent respectively.

Investors, who had stopped keeping a track of their portfolios for many months, are now beginning to take interest again. Thanks to this broad-based rally, many stocks that fell sharply in the past 14 months have recovered well.

For instance, Pawan Chaggar, a retired government employee, had an equity investment of about Rs 12 lakh when the market was at its peak. These included both mutual funds and stocks.

"My portfolio was down by around 54 per cent when I last checked it in October," says Chaggar. But in the past one month his portfolio has recovered by around 22 per cent.

Since the stock market skid, this is the first big rally. "It gives a better opportunity for investors to restructure their portfolio as the stocks of businesses that are doing badly have also gone up," said Gul Techchandani, an investment advisor.

But, for starters, let's look at what this rally means for an investor. Such rallies are called as bear market rallies. They typically begin after the market has been beaten down significantly.  

They are also sudden and often short-lived. And experts suggest the current rally is unsustainable as it defies all logic. "The inflow of money in the stock market does not justify the increase across the board," said a market expert.

Going further, majority of the experts feel that corporate results and next year guidance will continue to remain weak. Even the uncertainty over election results looms large over the market.

Typically, during a bull run, investors usually buy momentum stocks. That is, stocks that are leading the rally. In 2000, during the dot-com boom, investors accumulated technology stocks. Even mutual funds launched IT schemes to attract money.

When markets crashed, even the poster boys of IT were not spared. Take Himachal Futuristic Communication as an example. The stock had seen a peak of Rs 2,552 in 2000. The price came tumbling down when the dot-com bubble burst. It is now trading at Rs 9.06.

Similarly, in the last bull run, the real estate sector caught the frenzy of investors. The prices of many of this sector stocks are now down by more than 90 per cent.

"The prices never recover to their original levels in such cases, no matter how long investors wait. Finally, there has to be a sell-off. This current bear market rally gives an opportunity for investors to do that," said

Vipul Shah, director and health of private wealth group, JM Financial.

With overall stock prices rise, it gives the investor an opportunity to exit the stock at a better price. This minimises losses. In Chaggar's case, he wants to exit his real estate investment. He purchased shares of Housing Development & Infrastructure Limited (HDIL) just after the initial public offer for around Rs 550. This stock has risen 87 per cent in one month and is trading at Rs 118.95.

"The portfolio restructuring depends on the investor's risk appetite," said Suresh Sadagopan, director, Ladder7 Financial Advisory Services. This mean, investors who look for maximum returns may invest in sectors or companies that have the highest chance of losing money. Obviously, the risk should be spread by investing in companies across sectors.

Based on the current scenario, he classifies real estate as the highest in the risk grade, followed by infrastructure companies involved in construction, hotels, commodities and auto. At the middle of risk grade are engineering, IT companies, banking and telecom. Then are defensive sectors such as pharmaceuticals and fast moving consumer goods.

Investment advisers tell investors to look at only large companies in these sectors. "In an economic slowdown, large companies have the ability to weather the storm more effectively than smaller ones," said Sadagopan. They also rise faster than the smaller companies when the market turns around.

And in such times, it is best if you move out of bad stocks, even at a loss and move into better stocks. Given that all the recovery has been across the spectrum, this could be a good time to cut losses. The same logic should be applied to mutual funds as well.

An obvious question that comes to the mind of an investor is that if prices of  badly performing stocks in his portfolio increase allowing him an exit, so do the prices of good stocks, thereby making the transition expensive.

However, one has to take this blow instead of hanging on to bad stocks. Of course, if the stock you want to buy looks expensive, sit on cash. Keep buying in small proportions when markets dip, investment advisers suggest.

"The biggest advantage of such a rally is that it helps investors to take buying decision with a lot of thought and caution. So, they tend to buy better businesses," said Motilal Oswal, chairman and managing director, Motilal Oswal.

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Tinesh Bhasin in Mumbai

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