Seven Things to Avoid in Choppy Markets

Avoid extremes – fear & greed
August-September 2007 had been the investor’s delight due to the booming IIP numbers, 8.5% GDP expectations and the sub 5% inflation. The markets had reached a zenith on hope, and greed prevented investors from selling. The party poopers arrived in the form of a steep rise in crude prices, lingering and massive subprime mess in the US financials and the recent spike in domestic inflation. With fear gripping the markets in the changed scenario of continuing volatility and short-term bearish outlook, investors should take a balanced view and refrain from extremes... greed and fear

Avoid timing the management
The volatility associated with the see-saw battle between bulls and a bear is unlikely to declare the winner in the near term. Under such circumstances, long-term investors should avoid the temptation of timing the market by selling defensively at the top and buying at lower levels. Let us avoid hypocrisy. Even though everybody agrees on the futility of timing the markets. Most of us still try to do it with dangerous consequences.

Look Long Term
Investors with a long term horizon should avoid getting despondent with the short term moves aberrations in the equity markets. The present volatility on low volumes seems to be a temporary phase and we expect the markets to improve, albeit after a few months. Once the disturbing factors settle down. Investors should use this phase to fine tune their portfolio and avoid taking short term trading calls. The current valuation provides them an excellent opportunity to selectively cherry pick value stock across sectors.

Keep off worst hit sectors
Investors should avoid getting emotionally attached to sectors which are expected to be laggards in the medium term; the rising crude prices are likely to hamper the profitability of the airline industry. Similarly. In the rising interest rate scenario, one would be well advised to temporarily avoid interest rate sensitives like auto and realty and should use every rally to lighten their commitments.

Avoid exiting the markets
One should systemically build one’s portfolio by accumulating stocks at various falls across time instead of deploying the entire cash in one go. The same methodology should also be flowed while booking profits. Investors have traditionally ended up buying near peak and exiting near bottoms. A case in point is the TMT sector which was deserted by investors after the dotcom bubble burst in March 2000, only to find the sector rebounding in March 2003 when equities began to rally.

Don’t put all eggs in one basket
With the index swinging up and down, steady performers in solid sector remain the best bet. But this isn’t to say that one should completely avoid mid-cap stock and switch everything to large-caps. One should keep in mind that mid-cap stocks should be a part of any balanced portfolio, regardless of the current economic picture. Their growth potential is simply too great to ignore. Amongst the mid caps stocks, one should look for stocks with high insider ownership, strong balance sheet, solid business model and a compelling valuation.

De-risk by mix
The current bearishness is likely to attract new-comers who had missed the previous Bull Run. One of the hardest things for them would be identify the right picks in the market mayhem. Hence avoid direct exposure to equities and instead participate via good quality mutual fund schemes as equity investments are a full-time activity backed by research and analysis.The ongoing global crisis and the domestic economic situation have made it difficult to take short-term call. We don’t foresee an adverse change in the fundamentals of the Indian economy and still believe that the economy is likely to maintain a stable growth rate of 7.5% upward over the next three years. With that economy expected to grow at 7.5-8%, we see no reason why long-term investor should not enter the market at every fall.
-Bapa Sitaram