The other day, my neighbour told me she was going to make her foray in online trading.
I asked her what triggered off this interest.
Her response (I should have anticipated it) was that everyone had made pots of money in this bull market and it seemed wise that she too join the party.
She even named a friend, a housewife, who had raked in the moolah (read Get rich, sitting at home on how housewives have started trading in stocks).
When I told her it was dangerous for a novice to enter the market at such high levels, her naïve response was, "Well, I have to enter someday, might as well do it now."
Get real!
November 2004 saw the Sensex touch 6000. By September 2005, it had reached 8000. February 2006 had the Sensex touch 10,000.
This is the first time the Indian stock market has witnessed a sustained bull run over such a long period of time. Normally, bull runs tend to run out of steam within 18 months.
Moreover, unlike the IT boom of 1999-2000, where one sector led the way, this time the bullishness is distributed across sectors and stocks of various market caps.
Now, look at it objectively. The stock market took around 13 years to move from 4000 to 7000. But it moved from 7000 to 10,000 in around six months. Undoubtedly, that is phenomenal. At the same time, it's scary because it is obvious this pace cannot be maintained.
This means you cannot hope to get the spectacular returns that those who entered the market earlier achieved.
If you had entered the market when it was at around 5000, and sold the shares when it touched 10,000, you would have made a killing.
Not only would you have benefited from the appreciation in the stock, but you would have been selling after a year so you would not have paid long-term capital gains tax.
If you buy now, it is almost impossible to make such lofty gains. Moreover, if you plan on selling within a year, you will have to pay short term capital gains tax of 10% on the profits.
So, where are we headed?
Self-professed stock market pundits have been predicting all sorts of stuff.
Estimates of how long this bull run will last vary from a year to two to a decade. "This has never happened before and it will never happen again," said someone who is convinced that the bull run is here to stay for a few more years.
In case you are under the impression that a bull run cannot be sustained for that long, let me assure you otherwise. Investment guru Marc Faber who is known for his Gloom, Boom & Doom report, does away with the notion that a bull run cannot last for long periods of time.
He cites the example of bull markets in Japan (roughly from 1970-1989) and in the US (1982 2000) to prove his point that a bull market can also be 10 to 20 years long.
Others say the bull run has peaked. Still others claim it should touch 11,000 -- 12,000 levels by the end of 2006.
One thing is clear. No clear picture has emerged as to where the stock market is headed. Which brings us to what you, as an investor, should or should not do in such uncertainty.
To buy or not to buy?
Every Budget leads to a period of stock market volatility. So you will see volatility before the Budget and, depending on how the Budget is viewed, volatility after the Budget too.
While opinions differ as to whether the bears are still going to be hibernating for a while (and how long that time period would be), all are agreed that a correction (temporary dip in the Sensex) is inevitable.
That will be good to cool the raging bulls for a while. For you, it will be a good time to buy shares.
Don't just randomly invest. List down a few stocks you like but are not investing in right now because they are being quoted at a high price. When the rates drop, pick them up. Do it because you really believe in them and are ready to hold on to them for the long term. Whenever you find a dip in the stock market, buy them.
And, yes, be prepared to stay in for the long haul.
If you are not sure you can manage this volatility, it is best to invest in a diversified equity mutual fund. Here too, don't do a lump sum investment. Opt for a Systematic Investment Plan where you put in a small amount every month.
Take a look at your portfolio. Do you have any shares you are waiting to sell? Now is the time. If you have some stocks that, in hindsight, you view as junk, sell them even if you are incurring a loss. The best time to get rid of junk shares is during a bull run.
Final word of advice
Buddhism speaks of the 'three poisons' that are the root cause of human suffering: Ignorance, hatred, greed.
If I had to reword it to the root cause of stock investors suffering, I would put it as ignorance, greed and fear.
Don't be ignorant of the risk that the stock market holds. Bull run or no, stocks are risky investments.
Don't be greedy and invest in 'hot tips' that 'assure' you of mind-boggling returns.
Should the stock market fall or the inevitable correction take place, please do not panic and sell your shares.
These may sound straight and simple but. believe me, they are most difficult to implement since they go against basic human instinct.
So, be smart and stay disciplined.
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