Risk and Patience in Stock Market

You often hear the term “Risk Management” in tradings and stock markets. This article will not explaining the tenets of Risk Management, but together with the concept of patience, this paper will be showing you the potential role of risk and patience in evading stock market and trading problems.

In a scenario where the market comes to terms with a steep fall, some experts cannot help but analyze the situation. This is one article where Trade and Market experts expressed their valid opinions in such a scenario. First it is safe to identify that there were many factors including high leverage positions, lesser liquidity, rich valuations, FII selling, excesses in select market segments and rising global concerns among others that could lead to a steep fall in the domestic markets.

In a steep market fall, the following are some of the lessons that are learned. One of the obvious learnings for investors is to avoid leveraged positions vis-a-vis high exposure in the futures and options segment. Gul Teckchandani, an Investment Advisor, explains, "Avoid leverage. I've been saying that people who do F&O trading have a pathetic future."

Anoop Bhaskar, CIO, UTI Mutual Fund, adds, "Investors have to limit their expectations and cannot think of the markets as a 100-meter sprint. It is a marathon and you have to be patient." To state it simply, look at a longer term of over a year.

Vikas Khemani, Co-Head, institutional equities, Edelweiss Capital, says that “The other one deals with risks and rewards. Markets are driven by greed and fear. Markets rise, greed grows. When reward per unit of risk is high as is the case now, investors do not take risk. Investors are not looking at risk but are focusing only on returns. Risk factor should be borne in mind before investing. In markets like these, it is equally important to remember how much you can lose and not just focus on how much you can make."

One of the good considerations of investors, assuming that there may still be some downside left, is to examine the indices. If you are an investor and you see a fall in the popular indices or share prices across the board, you should not necessarily interpret that things have changed. It could just be an indication that the fall has corrected the excesses that existed in various pockets. But, more importantly, what it also tries to establish is that quality growth stocks can now be bought at reasonably fair valuations. In a wider angle, the price-to-earnings (PE) ratio of the market has fallen from 22 times to 17-18 times estimated FY09 earnings. And, given that corporate earnings are likely to rise between 18-25 per cent a year, over the next two years, the PEG (PE to growth) ratio at under one time spells comfort. A ratio of under one, to an extent and largely applicable to non-commodity stocks, indicates that valuations are not exorbitant.

But before investing in stocks and making deals with the sectors, it is important to note that the next three to six months or a bit more could be painful given that some uncertainties still exist. Hence, a long-term perspective of three to five years is most ideal.

With that in mind and also the macro environment, it's advisable to play safe by investing in companies with exposure to domestic consumption or investment plays. For example, companies functioning in the infrastructure and construction, banking and financial services, retail, telecom, entertainment, capital goods and engineering, and FMCG space, are better placed than sectors like information technology or textile exports, where companies derive a large chunk of their revenues from countries like the US. A firm financial status of a nation, uncertainty regarding IT budgets of US-based companies and cost pressures (rising wages) are among the factors that are weighing heavily on domestic IT stocks. The current situation suggests that good days are far from actualization.

As a contrarian strategy, investing in companies from the automobile industry can prove to be beneficial and perhaps capable of establishing a boost to overall returns. The reasons for the contrarian strategy anchors on the belief that sooner or later, given the rising interest rate differential between interest rates, the benign domestic inflation and subdued crude prices (under $90 a barrel), the RBI may be pushed to lower interest rates. Should that happen, it could translate to further growth for car companies.

Prudent stock picking can help achieve better returns. So, be disciplined, don't over leverage or take higher risks, maintain your asset allocation as per your long-term goals, be patient and be discreet in picking stocks, then you will reap benefits like never before!