I'm writing these words on the evening of 5th December, the day that the BSE Sensex first crossed 14,000 points. As usual, there will be a certain amount of hype, some breathless remarks by TV anchors and some big headlines, but many investors are no longer excited by these big round numbers. Everyone has seen far too many of them by now. From 6,000 to 14,000, there have been nine first-time round number events and nine is one too many to get excited about.
Also, even though the professional excitement-peddlers studiously ignore the maths, a thousand points of the Sensex isn't what it used to be. When this bull-run began four years back, the journey from 3,000 to 4,000 meant a gain of 33.3 per cent. From 13,000 to 14,000, the gain is just 7.7 per cent.
Investors are now so used to big gains that 7.7 per cent just doesn't hold any excitement. I think the next number that anyone should seriously get excited about is 20,000 but whether that will come around in one year or ten, I have no idea.
I'm serious. I didn't put that ten year range in that last paragraph just to frighten you. Ten years to reach 20,000 is just as possible as one year. Equity markets are like that. There's nothing you can do about it. In fact, in recent weeks I can see a lot of evidence of savvy investors preparing themselves for a fall in the markets. For example, many of the best equity funds in the country are now holding portfolios that are looking extremely cautious.
Some fund managers are holding up to 30 per cent in cash and have shifted largely to stocks that they think will not fall as much as the markets. Or, even if they fall, these are stocks of large, stable companies which will eventually earn their way out of any slump. This suggests that many knowledgeable investors now consider it wise to be prepared for a fall in the markets. I'm not suggesting, even for a moment that, it is certain that the market will fall soon. What I'm saying is that from now on, one should be prepared for it. One of the customary ways of doing so is to concentrate one's holdings into large companies. Large companies' stock has generally been seen to be more stable in uncertain times. Nonetheless, as our cover story this time shows, the definition of large companies has to be kept flexible. There are many formerly mid-sized companies that are now worthy of investment even at this point. However, the time has clearly come when one has to focus only on quality stocks and abandon the rumour-and-tip crowd even if one has been lucky with some of them in the past.
Effectively, this is now a market based heavily on sentiment (whether foreign or Indian) and such a market is inherently unpredictable. This could go on for months or even years. Or, something could happen today morning that will change the mood and end it all. It is important that investors should not leave any short-term money in the stock market. If you think you have some definite financial need to fulfill which you will have to pull money out of the stock markets over the next two or three years then you should start doing that gradually now. Clearly, from this point onwards, only money that you definitely won't need for long time should be invested in stocks.
That, and any 'fun money' that you would otherwise have taken to Las Vegas or some place like that.
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