That the retail investor is generally the last man standing with the ball when the music stops is well known. The last two years have been no different. With the implosion of the broader markets, which started off with the imposition of the long-term capital gains tax, we are left to ponder as to what is it that small investors can do about the situation? Do they quit the markets for good, only to find a newer set of investors step into their shoes to get slaughtered again in the next cycle? Or is there a way to break this cycle of entering at the top and exiting the bottom?
The last twenty-four months have been distressing to the retail investor primarily due to his/her propensity for investing in small-cap stocks. While there have been pockets of outperformance in very few sectors, it is very difficult for an average investor to catch the trend. It has been anyone’s guess as to which sector would be the next darling of the market and which company would give stellar returns to its investors.
This outperformance in a few pockets that are now named as “Quality” stocks, which is like rubbing salt on the wounds of investors! By no stretch of imagination can we call the broader market as “junk” due to its non-performance over the last few months. The divergence between frontline stocks and the rest of the market is broadening to an extent not seen in recent memory and the majority of the market participants have been caught on the wrong foot this time as well.
But there is still hope for retail investors who have faith in the equity markets. Reversion to mean happens sooner than later and it does so ferociously. So the mode of thinking for the retail needs to change. It has to be a straight 180 degrees change. There are a few general pointers that an average retail investor can consider while pondering over how to make that elusive fortune in the stock markets.
Time to invest
Believe me, it’s the best time to be an investor in the markets during times of economic downturn, low growth, falling corporate governance standards and distressed valuations across the board. When there is gloom and doom all around, newspapers & TV channels flash daily updates about slowdown, recession, job losses etc., it is the time to take the plunge. Instead of running away from the markets, take a hard look at stocks you would like to buy. Slowly and steadily build your portfolio, since the economy moves in cycles, and a rebound will definitely happen.
Follow the general guiding principles of high corporate governance, profitable growth, cash flow generating businesses, high margin of safety etc. to narrow down on your investment options in the market. Also, expand your horizon by a few years, since equities are always for the very long term. Slowly and steadily keep nibbling at stocks that you like; but do keep track of the performance on a regular basis.
Before the economy starts improving, the companies that are doing well, but whose stocks are languishing, will be the first ones to give indications that an eventual revival is around the corner.
This will work only if the investor is ready for the long grind, as at least one cycle of bear market needs to be experienced to be better-skilled in making money in the next bull-run.(The writer is Vice President - Kotak Mahindra Bank. The views expressed in this column are purely personal and do not constitute any investment advice.)