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Sunday, January 13, 2013

How to Time your Purchases & Exits in Stock Market?

Dear Reader,

We think everyone has this question in their minds i.e. How to time their purchases and exits from the stock market.

The above question is more important for you if you have been selling your stock investments after the recent run-up of Sensex to 19800. The question is should you be exiting just because Sensex is approaching the holy figure of 20,000, the 2008 highs or should you remain invested considering the fact that valuations of the overall market are much lower than what they were in 2007-08?

In our opinion, you should not, because if you are selling now you will most likely to re-enter when the Sensex will be at say 35000-40000 some years down the line and will therefore miss all the gains in between.

Do not believe us that you will commit the above mistake, click here and you will understand.

Coming back to the main question of how to time the markets, here’s what Mr. Prashant Jain (fund manager of HDFC Asset Management) had to say in one of his recent interviews:

Q: Do you think retail investors are making a mistake by constantly redeeming from equity funds instead of putting money in now?

A: I have been in this market for 20 years and I have seen three cycles now. Unfortunately, in each of the cycles, the timing has been quite bad. The bulk of the money has always come in at higher than 17-18 P/Es and we have seen that repeatedly.

Almost 80-85 percent of the money comes in above 17-18 P/Es. It is probably unfortunate, but in my opinion, these are the signs that history is going to repeat itself again.

(Our view: The above is the basic irony. Most retail investors exit at low valuations and re-enter when there’s too much hype around any asset class and then they get trapped for a long period with below average returns)

Q: Are you beginning to see any nascent signs of that in any fund because it is the mid-caps that have begun to perform etc? Are you beginning to see more interest perking up in some of these sector-specific or vertical funds?

A: Broadly, the industry has been losing money. We never see inflows at low P/Es and when markets begin to recover, we see outflows because people who feel they have been trapped and now some returns are there, they are taking out money. Almost 80-90 percent of the money over a cycle comes in above 17-18 P/Es and that is why investors are time and again disappointed with equities.

Q: The feeling from a lot of retail investors seems to be that we are approaching 20,000; this is a level where you should be booking out and not making the mistake of getting into another high. Is that kind of an approach a mistake?

A: I think so. When you look at the history of the SENSEX, it has delivered 15-17% compound annual growth rate (CAGR). It started off at 100 back in 1980s. At any point of time, we thought 1000, 2000, 5000 was high; it was a wrong way to look at the markets.

The correct way to look at the markets to my mind is to focus on the P/E multiples (basically valuations). Investor should simply practice low P/E investing and whenever P/Es are below average, they should keep on investing with two to three-and-a-half year’s view. They should either reduce allocation to equities or not invest more money when P/Es are high again with a two-three-four year view. That will lead to better timing than what they have historically been able to achieve.

At the end we would like to add that if you are more than 22-25 years of age, working somewhere or run a business, and able to consistently save some amount every month from your earnings, feel blessed because this is one of the best times to invest in stocks of good companies from a 3-4 years perspective.

Team - Saral Gyan