It is truly amazing how short-term our memory is. As soon as the market went sliding down from 15000 levels in early September to around 10000 levels, the same experts who were looking at 20000 levels in the long-term started predicting that the end is in sight. One expert even remarked that 9 days like these (of 1000 point falls), and the market will be at zero levels. While we know that will not be true, current conditions are truly unprecedented and global.




We invest in equity markets on two plains: the emotional factor, or what we feel about our investments; and the fundamentals, on the basis of which long-term movements are based. Let's take the first factor, and look at how euphoric we felt on January 10, 2008, when the index topped 21000 for the first time. There seemed no looking back; the year had just begun: FII allocations to a growing market like India would only increase, we felt.

Similarly, the world has probably come to an end last week given the size of the headline in the business papers. Have you ever wondered when a newspaper puts out larger than life headlines? It's only when there is less content to be printed on the front page! Sensationalism sells.



We have been through phases like these at many times. Emotions ran high during Harshad Mehta's time in 1992, followed by the Ketan Parekh scam in 1997. Technology was the answer to all our questions and more during the technology boom in 2000 as well. At the same time early 2003 seemed the pits for the Indian markets [read a website article, "Will the Sensex bounce back?" below], followed by economic standstill the day this Government was heading to power in 2004, and then in June 2006 when the market had shaved 31% in 31 days, and mid-caps were lying strewn by the wayside.





But let's forget emotion and focus on fundamentals. In April 2003, the Sensex had reached 2900 levels. Many experts were predicting levels of 2000 on the Sensex. The Price-to-earnings (P/E) multiple then was under 13 times last 12 months' earnings, and the price to book value was just around 2 times. Had one invested then during times of forecasted doom, but with fundamentals totally in place, even after the current sharp fall in markets in 2008, one would have tripled their investments in 5 and a half years, for a return of 22% p.a. compounded annually. The Sensex, of course, did bounce back - and how! The good news is that the current markets (Friday, October 24, 2008 closing of 8701) reflect a trailing P/E ratio of 10.6 times, and a Price-to-book value of 2.25 times.

Stocks and Indian markets do reflect tremendous value at present. However, we recommend that we need to be cautious in entering, by staggering investments by systematic investment plans and systematic transfer plans over the next 6 to 9 months. Those who feel "tempted" to enter at levels of 10500 lest they missed out on a great opportunity, should certainly consider a disciplined approach of putting in one-third of the amount now, and keeping the balance to invest in two tranches at 5-7% lower levels, but over a minimum period of two weeks.

In all the mayhem of the equity markets, let's not forget two other asset classes: debt and gold. Interest rates in India have topped off with inflation inching downwards and the liquidity issues in the markets preventing any further increases for now. If we go back to the start of this decade when interest rates in India were reduced sharply from 10% levels to 5.5% over a period of two years, I personally recall annual returns of 24% in long-term debt funds and over 35% in government securities funds. While we may not be ready for such "heady" times, we do expect that long-term debt funds will deliver returns of over 12% p.a. over the next couple of years. For investments with time horizon of between 6 months and a year, short-term funds are recommended.

Gold has had a volatile year. It climbed synchronously with the rapid rise in the price of oil; continued its ascent as the dollar weakened briefly even as oil prices fell, and then lost all its gains and more as the dollar strengthened rapidly. However, if current international prices of $ 700 per oz prevail, mining companies will go out of business, as their cost of extraction is around those levels. Further, with the US $ likely to weaken once the deleveraging of global (and particularly the US) markets is completed, the price of gold should resume upward. We may not get the 20% plus returns from gold that the past few years brought, but as a hedge against inflation, gold (through the ETF route) is recommended at 5-10% of your total assets. For the ones with greater risk-taking ability, an SIP in gold mining company mutual funds is advised.

On this festive occasion of Diwali, I wish you a disciplined approach to investing and the ability to filter out the emotions while sticking to the basics during the coming year.