Lot of you, like me, were uncomfortable with the valuations when the Sensex soared to 21k levels. But still you didn’t had the courage to sell as greed took over fear and held up with the stocks. Result: One is down 50-95% from the highs. Its time to look back and learn from our mistakes.
If you see most of the stocks at crazy and unjustifiable valuations (e.g RNRL @ 250, Adlabs @ 1900…) then that is the sign that market is most likely to peak out soon. Though its not easy to sell at the peak (you are just lucky if you did), its better to lose 10-20% on the upside than 50-90% on the downside.
Since timing the market is very difficult, what one can do is get into defensive stocks like FMCG and pharma with the highest ROE’s, if one is not able to stay in cash for some or the other reason. Though defensive stocks will also fall along with the market, stocks with highest ROE’s and earnings visibililty are likely to outperform the Index by a huge margin. (For example Divis Labs is down 36%, Nestle is down 10% year-to date whereas Sensex is down by 58%)
Since it was my first bear market experience in my life (and I am happy it came much earlier in my investing career), my argument was that if the economy keep on growing at 8%+ then the markets will not fall much and recover quickly. But I am proved wrong. Markets start discounting events earlier than the actual event. People are now expecting growth at 6.5-7% for FY09 and lower in FY10. Still we are better placed than all the countries except China but dependent on FII’s for capital flows.
Avoid businesses related directly to capital markets if you believe the expected earnings does not justify prevailing prices. These are the businesses which will be badly hit in the market crash.
As fear takes over greed or in other words there is extreme pessimism, stocks trade at very attractive valuation, then its the time to move on to aggresive bets. At this juncture, avoid taking calls based on macro, its time to look at micro. Remember this is a once in a lifetime oppurtunity as earnings will be back to normal, economy growth at 8% and the charging bull takes the market to new highs. But for that to happen, markets will first consolidate for the next six months (maybe between 9k-12k)