The Hindu Business Line : Weather the storm with financial discipline

THE frantic rush of the Bombay Stock Exchange Sensex past the 6200-mark and its equally hurried 500-point approximate fall have left most investors wondering which way is it ultimately headed. In the obsessive tracking of the gyrations of the index most of us lose sight of the fundamental truth that the Sensex in itself is not the `be all, end all' of prudent investing. It at best reflects the perception and the collective mood of the investing public.

As in every other sphere of life, stock market investment activity is ruled by the two basic emotions of fear and greed — fear of losing one's capital investment and the greed to make more than anyone else. Simultaneously the combative streak makes individuals constantly compare their earnings with those of their friends and associates. Unfortunately it is not so much what we haven't, but what others have that makes for our unhappiness.

As Gore Vidal said: "Every time a friend succeeds I die a little." It is in this battle of fear, greed and unholy competition that most of us loosen the reins of financial discipline.

Prudent financial discipline comprises well considered scrip identification, the conviction to ride the volatility and the strength to cash out on attaining predetermined targets, regardless of the noise level prevalent in the stock market.

The question that I am often asked by all hues of investors is where to invest the money for high returns and low risk. That sounds like a pretty reasonable request. However, the risk factor takes an escalator ride up when "high" returns get confused with "highest" returns — very often with the investors losing out on opportunities to capture and realise high gains in chasing the mirage of the "highest" returns.

Human psychology is such that when the pain of financial losses (read indiscipline) sets in we seek to accord blame to the modern "prophets". However, the stock market knows nobody by name or reputation: the market has its own rhythm of ups and downs, regardless of your wishes, your personal needs and your buy and sell orders. Bull runs are necessarily succeeded by bear phases and vice versa. But as the spiral moves upwards, the returns are tighter and it is at this point of inflexion that individual investment decision making process is hasty and reckless predicated on the back of a "missed out" feeling.

Where we stand today the macroeconomic parameters, the political climate and the overall sentiment of the investing public, considered all fingers point to the continuation of the bull run. Volatility and extended plateaus are attendant irritants since a unidirectional secular move is virtually impossible. That the index has already moved up substantially translates into there being higher risk on a comparative basis to when the index was lower.

In such an environment, investors should try and be tough on themselves in terms of expectations and be at the same time ready to ride through turbulent weather.

Each stock must be independently assessed for potential appreciation vis-à-vis the price movement it has already witnessed. And the will to translate paper profits to hard cash must rule firm. Else, you will be left echoing the words of Richard Armour: "That money talks I'll not deny. I heard it once. It said "Good bye!"

(The author is Chief Investment Officer, Sun F&C. The views expressed here are his own and not necessarily those of his firm.)

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