Sensex and Nifty: Should you pay attention to the indexes? | Value Research New stock investors tend to pay a lot of attention to the ups and downs of indexes. Are they reflective of what happens with their own stocks?
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Should you pay attention to indexes?

New stock investors tend to pay a lot of attention to the ups and downs of indexes. Are they reflective of what happens with their own stocks?

Stop paying attention to the indexes - they don't matter to your stocks. While all experienced equity investors eventually reach this conclusion, the realisation comes after some time. It feels quite counter-intuitive. Surely, if everyone talks about the Sensex and the Nifty every day, then they must be the most important thing for investors, isn't it?

Let's look at what has been happening in the equity markets for some weeks now. The freshers' class of equity investors - those who have joined this college within the last two years and of which there is now a large number - has been going through a hard time. The markets have decided to subject them to a hard bout of ragging. Of course, they had stories that all this was bound to happen at some time, but stories are one thing and first-hand experience is quite another.

So, from being a fresher, how does one discover the irrelevance of stock indexes? Here's how that happens. Before you become an investor, all your knowledge of the markets generally comes from the media. Since you are not an investor, all you pay attention to are the headlines. Much of these are obsessed with the indexes - specifically, the headline large-cap indexes like the Sensex and the Nifty. Subconsciously, non-investors get this impression that these are important numbers and every day, an investor has a good or a bad day depending on whether the Sensex and the Nifty went up or down.

Then they start investing and discover that the story is something else. Except for the small proportion who are investing through passive funds or derivatives based on these indexes, the reality is that all that matters is your stocks. Take what happened on February 14, 2022. The Sensex crashed by 3 per cent, which is 1,748 points, a fairly large descent for a day. The next day, the 15th, it recovered almost exactly to the point from where it had fallen. As far as the headlines go, the story was over. Fell 1,748 points one day, rose 1,737 the next.

However, in the realm of individual stocks, it was quite different. Looking at just the 200 largest stocks in India, around 140 of them did not manage to return to the same level. Around half of them were more than 1 per cent down after this putative 'recovery' from the one-day crash. Fully one-fourth of this sample ended up more than 3 per cent down after the one-day recovery was over. The strange thing is that freshers try to take comfort from the rise of the indexes, even if their stocks are going down. The attitude I hear is that since the markets are 'good', surely the stocks will recover sooner rather than later. This can be made to sound logical but is based more on hope than reality.

In a way, a phrase like this is a necessary part of the education for new investors. When markets are shaky, and money is not flowing in, then the good, the bad and the ugly get differentiated. It matters not one bit whether the Sensex and the Nifty are going up or not. That matters only to the headline writers.

However, we investors would like to be invested in stocks that converge with the indexes when the markets are good and diverge when the markets are bad. Again, to the fresher, this seems like wishful thinking, but it's not. The indexes are averages and there are always stocks that do better than the mean, as my example above shows. The question is, how do you locate these stocks with confidence and a high degree of success?

As I'm now fond of saying, that's where Value Research comes in. Specifically, that's where our Stock Advisor service comes in.

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The list is an input which you can use as is, or as a shortlist for further research, the tools for which we also provide you. One such additional tool is our Stock Screener, which is a unique system unlike anything else available in India. You also get detailed financials of every listed Indian company, not just the ones on our recommended list. Of course, our team also supplies you with updated guidance on all the stocks on our list, including the rationale for investing or disinvesting.

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So, stop paying attention to the headlines and head over to Value Research Stock Advisor.


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