Take a break from the Stock Markets-

INVESTMENT HOLIDAY

(This appears in yesterday/today in Deccan Chronicle.  Do not chase the market, unless you have the stomach for it.)

 

There is a strange phenomenon in the air. As the market keeps going higher, we all fell very wise about our stock picking skills. Almost everything we ‘identify’ for possible investment seems to keep going up. Truly, makes an expert out of all of us.

 

These are great times to be in the stock market. In fact, we feel left out if we are not in. The mutual fund folios in equity mutual funds are hitting new records each day. It seems like it is the last train leaving town and everyone wants to be on board.

 

I read a foreign brokerage report that says that our markets are ‘expensive’ relative to historic valuations. However, being a brokerage, it has to keep printing, “buy” ideas so that its investment banking business and corporate finance business do not suffer. So it hastens to add that our markets are not as expensive as some other ‘emerging’ markets in some global baskets.

 

What is interesting to see is that most written off sectors seem to be back in favour. Commodities, finance, PSUs etc are back in favour. Even textiles, auto ancillaries and plastic fabricators seem to be headed to stratospheric valuations. There is cheer on the street.

 

The interesting thing is that globally, markets seem to be hot. Valuation rules are conveniently changed to justify higher and higher valuation for the unchanged earnings outlooks or potential. For example, we like to hear that GST will be a miracle boost for valuations. Pause. GST simply means higher or lower prices to everyone and competition will ensure that profitability is not abnormal for anyone. Retail or business prices will adjust to the new effective rate of taxation. Similarly, any company getting to even make a screwdriver that would be used by the defence sector gets a huge valuation kicker. Be cautions. While it may mean additional revenue for a few companies, by and large it would not mean corresponding earnings growth. I could be wrong if the market re-rates the valuation for these companies, giving multiples that are patently not related to the fundamentals. It has happened. You have to look at valuation of stocks of companies like Gillette or P&G.

 

One thing to focus on in this market is “LIQUIDITY”. In a bull market you end up buying things easily. Check on the number of shareholders and the spread thereof. There are ‘hot’ mid caps with less than ten thousand shareholders! What it means is that in a bull run, they will climb quickly. In a corrective phase, there would be only sellers and you will find it difficult to even sell fifty shares without taking a steep cut from the quoted price. Midcaps are by nature illiquid. One other thing that can be spotted is that volumes increase with price rise. Stocks, which hardly traded a few hundred shares a day, become actively traded once the price jumps up. These are classic signs of operator driven action and often end up as poor stories.

 

So what does one do in this market? Have you heard of a concept called ‘drug holiday’? Here is an extract from Wikipedia:

“ A drug holiday (sometimes also called a drug vacation, medication vacation, structured treatment interruption orstrategic treatment interruption) is when a patient stops taking a medication(s) for a period of time; anywhere from a few days to many months or even years if they feel it is in their best interests.

Planned drug holidays are used in numerous fields of medicine. They are perhaps best known in HIV therapy, after a study showed that stopping medication may stimulate the immune system to attack the virus.”

Many of us are addicted to the stock markets. A break is strongly recommended. It will help one to conserve one’s resources. And also prevent us from building a ‘long term’ portfolio out of short term trades that go wrong.

Markets will find a reason to correct or stagnate for a long period of time, till the earnings catch up with valuation. Yes, liquidity can do strange things for continued periods of time, but then, the odds of making a great return from stocks keeps going down as valuations keep going up.

It is time to exercise caution. Reduce exposure to equities. I am fairly sure that we will get better opportunities. After all, we surely have a window of anything from twenty to forty years where one would be adding to the investment portfolio. And you do get five to ten opportunities in that. Get ‘detoxified’. It is good for your financial health. Keep adding to knowledge. Make a list of what stocks you would like to own. Write a ‘buy’ price against it. Wait. The odds of making money to losing money in the stock markets at this juncture makes me content to stay on the sidelines.

 

R Balakrishnan