May 29, 2009

Missed the Bus?Dont miss the Flight

Many individual investors feel that they missed the recent stock market rally. The stock market gave a fantastic over 30% returns in just a couple of months and stocks with high beta (higher volatility to the market) gave more than 50%. Those who invested in stocks then (and very few of them did) enjoyed enormous gains. While those who had put in their money a year ago are still struggling to break-even. But it was not only the retail investors who missed this years spectacular rally.

Almost all Mutual Funds (supposed to be managed by smart money managers) were sitting idle all these months. Mutual Fund data shows that funds were sitting on a cash pile of upto Rs 20,000 crore !!! as of April-end. They were waiting for the market to correct post-election. But just the opposite happened. The election results were un-expectedly positive, the market zoomed and everyone were a mere spectator to the rally. But money managers should have realized that valuations had already hit the bottom. Unsystematic Risk was still there and there was no strong reason enough to be optimistic but it was clear that many stocks were dirt cheap and the path from thereon was north-wards towards their fair price even though at a slow pace. But they totally missed it. What are these funds doing now? They are waiting again as they think valuations are too high now ! to enter so they want to wait before prices correct again. These Investment Mangers advise investors not to time their Investment and have a long-term horizon to achieve decent returns. But what they themselves do is the opposite.

Individual and Institutional Investors may have missed the bus by not getting in the market. I think, if they continue to wait further, they might miss the Flight towards the next rally.

2 comments:

Manindra said...

Mak bhai I still think valuations in India are quite on upper side. There is too much irrational exuberance and people don't look to fundamentals at all. I may be wrong in short run but there is hardly any stock with good fundamentals aka good financials & good management which is also available @ not too high price. Having said that, I would recommend to look for low P/E ratio companies with sound financials of at least last 5 yrs and I am sure there are few bargains left in the market!!

Makarand Prabhune, CFA said...

Thanks for the valuable comment Manindra Bhai. I agree that people behave irrationally a lot many times. Not all stocks are a screaming buy at current levels but i am positive that there are good value picks at the moment and you correctly mentioned as to how to identify them.