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Last Updated : Jun 05, 2017 11:56 AM IST | Source: Moneycontrol.com

Sensex mantra: Top 5 golden rules to remember when market trades in ‘Boom’ cycle

Investors should tread cautiously, and buy on dips. Keep an eye on valuations.


By Larissa Fernand

Morningstar India

Sell in May and Go Away is an aphorism that no longer works in India.

In fact, over the past few years, May has been a pretty good month. And the indices scaling new highs in May 2017 (with predictions of 31,000 Sensex levels in June) served as a stark reminder that we are in the midst of a raging bull run.

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But this post is not about to debate whether we are experiencing the mother of all bull markets or are in the midst of a rapidly ageing one where the day of reckoning is due. Such market prognostications are perilous at best.

The point is, no matter what the state of the market, adhering to an astute investing strategy is always wise.

Just this week, I chatted with the CIO of a large mutual fund. He views the market from a perspective of three broad cycles – the 3Bs.

Cycle 1] Buy aggressively.

Hold your horses, we are over and done with this phase.

Cycle 2] Boom time.

This is where we are. Money is flowing into the market. Everyone is optimistic and predicting happy days ahead. People tend to forget that the market is NOT cheap.

Cycle 3] Bubble.

Equity during this phase is very risky; exit aggressively and book profits before the inevitable Bust.

We are right now in the mid-cycle. The bull market is neither cheap nor young but has not yet run out of steam. So how do we conduct ourselves when the euphoric levels are high and we are afraid of missing out?

Understand that risk is not what it seems.

Seth Klarman, who oversees one of the largest hedge funds in the US, gives an interesting tilt to the all-pervasive optimism.

When the perception of risk was high in 2008, the actual risk was really muted. Why? Because share prices were so low, they made excellent buys.

When the perception of risk was low, as it was in 2007 (and now), the risk was much more elevated. Why? Because valuations were steep. That was the time to sell, not buy.

In other words, a rising market does not mean investing is less risky.

Don’t get carried away.

Even if you have spare cash, don’t feel obliged to plunge into the stock market.

1) This is a grave error investor make. Investors rushed into equity funds in 2006 and 2007. But, instead of staying invested (and continuing with SIPs) when the market crashed, they kicked their investments to the curb. So the actual investor experience was tragic.

Just remember, irrespective of the state of the market, it is business as usual. Here’s what that means.

2) If you are investing in funds, don’t stop your SIPs.

3) If you are commencing a SIP, ensure that you don’t need the money for at least 7 years.

4) Don’t blindly opt for funds that top the returns chart.

Which means, don’t opt for a mid- or small-cap fund based on past performance. It may not be able to replicate such an outstanding performance going ahead.

And don’t just look at chart toppers. For example, under the Morningstar Flexicap category, a fund like JM Basic has put up an excellent 1-year performance while Escorts High Yield stands out in its 3-year performance.

That does NOT make them sound investments. Pick a fund from a good fund house, which has a consistent strategy that goes with your overall portfolio.

5) If you are planning to buy stocks, work with a substantial margin of safety. Even if you don’t get the right price now, be patient. There will be corrections and dips. Buy then.

Stay grounded.

The market has had a great year this far. But resist the temptation to throw all your money at equity. On the flip side, don’t pull your money out of the equity in the fear that the market has peaked.

Respect your pre-determined asset allocation. It will keep you grounded.

Clean up your portfolio.

This is the best time to sort out your junk. Any mid-, small or micro-cap stock that has delivered admirably but is no longer justified by fundamentals can now go.

Disclaimer: The author is Editor, Morningstar India. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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First Published on Jun 5, 2017 08:56 am
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