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A continuing wave of global liquidity helped push world markets higher in 2006, with gains for equities, bonds, commodities and property. In India, as the macroeconomic, high growth story combined with a sharply expanding money supply, corporate and retail credit growth and record foreign currency inflows, all asset classes performed well.
While the stock market returned over 46 per cent for the large caps, property prices appreciated between 50 per cent to 100 per cent across the major metros in the country. As banks struggled to meet the credit requirements, the deposit rates have climbed to the 8 per cent to 9 per cent range.
In 2006,the average investor, made money in the following ways:
Given this background, what advice can we give the Indian investors in 2007?
Know thyself:
The cardinal principal, and one that is even more important in today's stretched valuations environment, is the investor must know three things about themselves:
Based on answers to these basic questions, the investor can build a map of his/her investment profile.
Combine this profile with the current income, expenditure and savings numbers and the investor can build an ideal asset allocation for himself/herself. Once this asset allocation is arrived at, the actual portfolio construction or changes to be made to the portfolio can be undertaken.
Do your tax planning:
It is critical for the average retail investor that they minimize their tax outflows by making full use of all the exemptions allowed by the Income Tax regulations. This also includes maximising your Provident fund contribution. The principal deducted and the interest paid are both tax exempt at present and at 9 per cent plus, give a very sound return in pre tax terms.
Save more, invest well:
Indians are saving 29 per cent of the GDP at present. In China this is as high as 42 per cent. Every household must aim at saving at least 30 per cent of their net salary/net income. If you are saving more, that is a big advantage on the path to a successful financial life. Even more importantly, after saving that 30 per cent or more, you must invest all of it in a regular, disciplined, diversified and intelligent manner.
The hierarchy of investments is as follows:
Earn more:
There is a huge talent shortage in the economy at present. This will stay for the next few years as the economy is expanding rapidly. Sectors like infrastructure, real estate, IT, ITES, financial services, retail and hospitality are booming and will need a lot of talented employees to sustain this growth. Upgrade your skills, look for career breaks and participate in this golden period for the Indian economy. Many sectors are seeing biannual compensation reviews, with deferred bonuses and profit participation coming to the fore.
Focus on increasing your earning potential in a disciplined and mature manner.
Dont leverage for stock market investing:
The one big lesson of May to July 2006 was this. While the large cap indices in 2006 went up by 45 per cent, the mid cap indices were up a lesser 25 per cent. And most of the margin traders, who were carrying leveraged positions in the stock market, actually made losses in a spectacular market like the one presented by 2006.
Don't leverage to invest in the Stock market, the risk reward ratio at these valuations is skewed more towards risk, and the probability of wiping out your entire capital is high in the short term if you run leveraged trading positions.
Buy gold:
Even though on a 27-year basis, gold has returned barely inflation equaling returns, gold is a good hedge in times of geopolitical and commodity based risks.
The last 5 years have seen spectacular returns for gold, and it hit a 26-year high in May 2006 of $730 per troy ounce.
Gold will continue to do well, there is a basic demand supply gap in its favour and as the currency markets get more volatile, we expect gold prices to firm further.
Don't lose money:
If you feel that you have the three 'T's -- training, temperament and time, by all means trade directly in the stock markets. However, buying stocks is easy. There are many theories for why and when to buy. But buying is only the first half of the equation when it comes to making money.
Nobody ever talks about the hard part - knowing when to sell.
In order to invest successfully, you need to put as much thought into planning your exit strategy as you put into the research that motivates you to buy the investment in the first place. The exit strategy must help you methodically cut your losses and let your winners ride. Following this rule, you have a high
|
Table I |
|
|
% fall in share price |
% gain required to get you back to even |
|
10% |
11% |
|
20% |
25% |
|
25% |
33% |
|
50% |
100% |
|
75% |
300% |
|
90% |
900% |
chance of outperforming the markets. Have a predetermined level, so 25 per cent or 30 per cent, at which loss level, you will systematically and unemotionally cut your position. The great fund managers are masters at this.
Table I illustrates this very starkly. And this is what did in a lot of the leveraged margin traders in May and June 2006.
Respect your money:
Earning, saving, investing, the entire cycle is built on your talent, your hard work and your sacrifices. Don't throw away your money by investing in fads or on tips. And as crucially, don't let inflation eat away the money lying idle in savings or current accounts.
Minimise taxes to the extent possible by utilizing all the exemptions available to you for tax planning.
And remind yourself; there is an Rs 8000 crore (Rs 80 billion) advertisement industry out there, which is encouraging you to buy that latest vacation, latest mobile, latest LCD TV, latest car or bike.
We are living in a booming consumption oriented society where the old virtues of thrift are being pushed back by the false promises of conspicuous consumption. Respect your money and spend it wisely, and only after investing 30 per cent first.
Respect the market:
My final recommendation is both philosophic and experiential. Like the Bhagavad Gita says," The Self is both the friend and the enemy of oneself ", the market can be ones best friend or ones worst enemy.
The best way to make it your friend is to respect your money and respect the market. It is not irrational. In the long term it reflects the fundamental underlying realities. India is on a 25 year plus growth trajectory. However, many times the expectations will run ahead of themselves and cause turbulence in the markets in the short period.
Safeguard yourself against this, by following a systematic asset allocation and by having a long-term perspective. Buy cheap and hold for the long term. That is the best way of showing respect to this market, which is benevolent, and a true friend of the long-term investor.
The author is CEO of Lotus India Mutual Fund.
For more on mutual funds, log on to www.easymf.com