We normally talk about a bubble when asset prices go beyond fundamentals on their way up. However have we ever used a phrase Bear Bubble to indicate excesses on the downside? Well this was the thought that actually crossed my mind some time back when the Sensex was down at around 12800 + and there was endless rhetoric on how the markets could go to 10000 levels.
Given that the Sensex now trades at 13 times FY09 Earnings (assuming an EPS of Rs. 1000); one would have considered such valuations attractive. However given the uncertainty due to several factors such as oil, commodity prices, inflation, weak global cues; persistent FII selling has unnerved not just first time investors but several market veterans as well. One is forced to think whether to invest or to wait. People who have been waiting for this opportunity or who jumped in (at 17000 levels) when the market initially corrected now believe there is more to come. The weak IIP numbers that came out on Friday would probably compound their fear.
This has clearly created what I would term a Fear Bubble. Bubbles at the end of the day are just bubbles whether on the way up or the way down or in our minds. What matters is how we filter the noise around us, take a perspective on the growth of the Indian economy going forward 5, 10, 15 and 20 years down the road and make choices that will deliver superior returns in a portfolio. What I am talking about is nothing new and I must have repeated some of these thoughts in my previous columns as well. The reality is that there is nothing radical or extra ordinary that can be done in such situations. Such tough situations ask for some basic set of behaviors and principles to be adopted.
There is a lot of focus on action in every market situation. In a bullish market, the focus is to get in the market and in bearish situation; the focus is to get out. People believe that investment returns are a function of getting in and out of the market on time. Additionally the common belief is that one must do something every time the market goes up and down. Nothing could be further from reality. There is no equity portfolio today that is not in the red (if you have started in the last 1 year). Every portfolio whether it be institutional investors or retail investors would have some element of red in it. This is no reason to alter your investment strategy if you indeed have one. Your situation is completely unique and if it warrants a certain exposure to equity, so be it. Your equity allocation would have certainly come down and it’s time to scale it up in a staggered fashion and ensure that you continue to buy during such times.
Review your investment plan and see if there are any course corrections that must be done. Don’t just exit investments because they have gone down. However if there are aggressive investments, look at toning down the aggressive investments and restructuring the equity portion of portfolio with less volatile investments.
Money needed in the next 1 to 2 years should never be in equity and money needed after 5 years can always be in equity but in line with your overall asset allocation. When you invest money needed in 5 years and more in equities, you are taking a calculated risk and also at the same time reducing your risk (considering that you have made good choices of investments). Investing money needed in the next 1 to 2 years in equities is taking on extremely high risk , something that one should comfortably avoid.
Don’t look at products or investments you do not understand. Several investors are tempted to go short or trade in derivatives to make up for the red that can be seen in the portfolio. This can only result in further pain and I have come across countless examples where people have actually taken a lot more risk to cover up for losses.
Additionally avoid most of the complex structured products that many institutions are now coming out with or any flavor of the season offering. Today people would like to participate in the upside of equity without the associated downside and uncertainty. People like to hear terms such as Capital Guarantee with Nifty linked returns. There seem to be utopian institutions that just manage to do that. I wonder why such offerings are not launched when the markets are moving towards glory. That’s a different story altogether but the point is avoid such offerings.
No one knows when and where this Bear Bubble will stop and reverse. One thing I know for sure though that there will be brighter and sunny days ahead and the pain that we are witnessing today will be forgotten like a distant and bad dream.