MUMBAI: The Sensex has touched 9000 and as the analysts like to say another psychological barrier has been broken. So where does it go from here?
There are analysts who have gone to town about the Sensex surpassing the 10,000 mark. A weekly news magazine and a Securities and Exchange Board of India member even predicted that the Sensex will touch 16,000 in the days to come.
But every yin has a yang to it. At the same time many analysts have been saying that a correction is long overdue. Some of them have been talking about a correction happening since the Sensex first touched the 6000 mark in January 2004, almost two years back.
But the party with a few bloopers here and there has gone on for quite sometime. Basically most people, analysts included, are not really sure as to where is the Sensex headed to. And how about the corrections? Well on that your guess is as good as mine. Given this, investors should keep certain things in mind while investing in the stock market.
The question bothering most of the investors is what do they do now? Stay on and ride the wave or make the best of the present situation, sell off and get out. Well to this there is no standard answer. We all have to make our own answers to this open-ended question.
What is important in such situations is to know what your investment destination is. It's very important for an investor to have a target return in mind. Both for his overall portfolio and individual investments.
Economic theory through the law of demand tells us, when the prices are rising, demand falls and when prices are falling demand increases. A stock market doesn't quite work like that.
As the stock prices go up, the more stocks appeal to investors. Making use of this factor a lot of public offerings have been very aggressively priced in the recent past.
Companies which have made profits for just one quarter or few quarters have issued shares at price to earnings ratios of greater than Rs 100. Investors need to be vary of such companies as the trend is likely to continue in days to come.
The best strategy for investing in a lot of these companies is to apply for the public offer and get out of the stock on the day of listing. As data for this year's public offer returns proves, the chances of making money on such stocks is greater if the investor is lucky enough to get shares when he applies for the PO. Investors who buy the stock on the day of listing generally lose money in a majority of cases.
If the idea is to speculate and try and ride the market then the best way out is to have a certain percentage of the total investment separately earmarked for it. "How much loss the investor is ready to bear", if an investor can answer this question, he knows how much money he should earmark for speculation.
Another rule that investors should keep in mind is what Benjamin Graham recommends in his book, the Intelligent Investor "We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds".
He further says "According to the tradition the sound reason for increasing the percentage in common stocks would be the appearance of the "bargain price" levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common stock component below 50% when in the judgment of the investor the market level has become dangerously high".
Bear in mind
It's important for an investor to have a target return in mind for his overall portfolio and individual investments
Investors need to be vary of public offerings issued at very high price to earning ratios
As markets start reaching what an investor thinks are unrealistic proportions its time to move some part of investment from stocks to fixed income instruments
