The media coverage when BSE Sensex lost 6 per cent in a single day was so widespread and dramatic that it would have instilled terror on retail investors, especially those who don’t understand the stock market. While the market losing points is a concern, what the investors need to realise is that the impact is the same if Sensex loses 6 per cent in a single day or across few days. But the latter rarely makes newspaper headlines.
If we analyse the Sensex trend, we can see that it had lost 10 per cent across four weeks from April 13 to May 7, 2015 and I am sure lot of short term investors lost money during that period. Purely looking at it from an investment point of view, it is worse than a single day loss of 6 per cent. It’s all part of the game. On the other hand, Sensex gained 10 per cent over just three weeks, from January 7 to 29, 2015 and many investors booked huge profits during this period. I don’t recollect media going gaga over it.
There is a huge scope in educating the retail investors. If we are looking at equity as one of the investment options, then the rule of thumb is that you need to have long term horizon. For Warren Buffet, the most successful investor of America, the stock market is a device for transferring money from the impatient to the patient.
Even after the 6 per cent single day loss, Sensex gains are at 38 per cent over the last two years at CAGR of 17 per cent and at 43 per cent over 5 years at Compound annual growth rate (CAGR) of 7 per cent. So, did the investors really lose money? Not if you had invested in Sensex two or five years ago.
Now let’s come to the fundamentals. What does the Sensex indicate? It’s just the health of overall equity market in India, a weighted average of 30 stocks across different sectors and industries. Internally, it’s an indicator of the health of public companies. Inherently owning a share of company is same as partly owning a company or a business. The mindset should be similar to buying a business where a lot ofdue diligence goes in before buying or taking over a running business.
Let’s look at the worst case: Is there a possibility of companies going bankrupt? Yes, definitely. But public companies are mandatorily obligated to disclose the health of the business in their quarterly results/guidance announcements. Investors need to study the companies they want to invest in and then keep track of their results, future plans and market potential.While researching about the companies before investing is a necessary condition, it’s definitely not a sufficient condition. There are other factors that affect the share price of a given company. Every business tries to increase their market share in their respective industry or sector and thereby increase the revenue year on year, with ultimate goal of increasing shareholder value.
Interest rates
There are many parameters impacting this market as a whole. Consider the simplest example of the RBI deciding to raise the interest rates by a few basis points. This will reduce the overall demand for loans as the EMIs for same amount of loan would be higher. Car sales could directly get impacted due to this reduced demand.
Similar could be the story in real estate sector impacting the property sales and it could have a huge impact on the revenue or the cash flow guidance given by the real estate companies. Any impact to future cash flow would influence the company valuation and thereby share price.
Some of the other macro level parameters impacting the stock market include the GDP growth, inflation, exchange rate fluctuations, industrial and agriculture output, political stability etc. The bottom line is, if the projected demand for goods and services is hit, it is going to have an impact on the projected revenues and cash flows and in turn on the company valuations.
Latest information about some of these parameters affecting stock market need to be tracked continuously. While knowledge about business and stock market is a must, applying that knowledge based on the latest information is the need of the hour. Information processing has now become the key, the faster you have access to information and the faster you have the ability to process the relevant information better you are equipped to make the right decision.
If retail investors cannot dedicate time to research company performance and ability to execute or track information that is impacting the market or the market share, they definitely have an option of investing in mutual funds where fund managers own the responsibility of researching and processing information. In addition, they also reduce the overall risk by diversifying the portfolio (investing in multiple companies/securities). It’s all summed up in a beautiful quote from Peter Lynch: “You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.”
(The writer is Senior Manager, Citrix India R&D Pvt Ltd)
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