Stock markets: What to look for?

As the Indian markets yo-yo madly, they seem to be making even the savviest of investors rethink their investment strategies.

However, despite all their ills, the declines that we have witnessed in the month of May (see graph below) have once again presented investors with an opportunity to buy into stocks.

The reason for these falls are many -- political uncertainty, firm oil prices, the likely rise in the US interest rates and terrorism.

As these uncertainties continue to haunt the stock markets, beginning Black Monday (May 17), we had asked our audience what their decisions would be with regards to investing in these volatile times.

And not to our surprise, a majority (51%) polled that they would be buyers in these times. On the other hand, while 39% voted for the 'Hold' option, only a small 10% polled that they would be happy with cash in their hands.

Our view

We have reiterated that in these cases, when the markets are at their highest levels of volatility, a staggered and a long-term strategy is most likely to be successful in providing investors with adequate returns on their investment.

Also, at these times, Benjamin Graham's parable of 'Mr Market' stands in good stead. This is, probably, one of the best metaphors ever created for explaining how stocks can become mispriced.

What Graham tells investors through this parable of 'Mr Market' is that they should make these fluctuations as their friend rather then their enemy. This means that they should neither give in to temptations that rising markets bring with them nor should they think of doom when the markets are falling incessantly.

Whatever the experts may say, we suggest investors to utilise this weakness to their advantage and build a long-term concentrated portfolio of stocks.

If one feels that the volatility is too high, then it is advisable to invest in a staggered manner (directly or through a mutual fund). But the common question is, which stock to invest?

The point we are trying to make is that stock markets always take time to reward performance. Keep in mind that stock prices tend to follow the long-term profit growth prospects of any company. It is just a matter of looking beyond who is selling and why is he selling?

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.