The Hindu Business Line : Battered and bruised

As the Bombay Stock Exchange (BSE) Sensex shaved off almost a quarter of its size — falling from a high of 12600 points to a low of 9200 points last week — equity analysts, stockbrokers and other market participants, not to forget investors and traders, chanted the same old mantra... people do not learn from their mistakes.

In 2001, well before he became the byword in the world of Indian equity, and every word he uttered was anxiously scanned by the players in the equity market, Rakesh Jhunjhunwala had told Business Line in an interview that while 15 years' experience (till 2001) had taught him many things and made him "dynamic, it has also humbled me. I was once one of the most dogmatic men. But the market has taught me that I can often be wrong."

Well, the subsequent years have proved that he has certainly managed to learn from his mistakes and make a huge pile from his equity investments. But, as Rahul Rege, Senior Vice-President, Sharekhan, points out, the present crash in the equity market has proved once again that "there are very, very few people who are able to outsmart the market". This is his response when asked if that rare class of investors — however small — which is able to systematically book profits does exist. "Most people do not listen when you advise them to do this, and hence very few people have managed to escape being hit very badly by this meltdown."

He is not optimistic that the market will recover in a short time. The outlook is bleak because "most people have taken a very bad hit on their portfolios. The kind of beating the market has taken, even those who have some money left have lost the confidence in the market for the time being."

On whether the market had given any signal on this fall, Rege says that even when the market went up in quick and huge bouts of upswing, "it didn't excite me. When you have the market opening with a huge gap and swinging 200-300 points up or down, it is not a healthy sign."

He adds that while the indices were climbing "everybody was very buoyant and excited but on the way down, it has become extremely difficult for people to stomach the fall... and the kind of fall, accompanied by extreme volatility, that you've seen in the index in the last three weeks clearly indicates that it will take a long time for the indices to bounce back from these levels and settle down. The volatility that we've seen in the last few weeks and the huge swings are beyond any kind of volatility seen in the past."

Why this meltdown?

Kartik Jhaveri, Director, Transcend Consulting, a Mumbai-based financial planning firm, thinks that stock market gyrations are part and parcel of the process of equity investment. "Right now I see no particular reason from an investor's standpoint why the markets should have corrected. The economy is sound, the political and financial situation is stable, and no scam has been unearthed. We are on a growth trajectory — this fact has not changed and will not change for many years to come."

On the negatives front, he says a hike in interest rates has been long expected, oil prices have been rising and "the markets knew that they were going to rise even further."

He thinks that in the short term the market can be volatile "but in the long term... and by my definition `long term' is five years or more... equity is the instrument that will create the maximum wealth, provided the investment deployment follows a discipline and sound advice from neutral professionals."

C.J. George, Managing Director of Geogit Financial Services, explains the present meltdown thus: "The market was a little overheated and was looking for a reason or a trigger to correct. When that trigger came, in most of the mid-cap stocks, there was no liquidity." With that being the case, people started selling the large cap or "very sound company shares. And when these counters fall, and very few people come forward to buy them, it signals that the confidence of the investor has gone." As the prices started falling and margin calls were pressed in, it only accelerated the fall, and "shares pledged with banks or the NBFCs, or kept as collateral with brokers, were sold and the whole thing turned into a vicious chain reaction," he explains.

Emotional exhaustion

So what have investors been doing through the choppy last three weeks? Are there people who have remained calm and picked up good stocks at cheap valuations?

Rege says he can't think of "too many people who have remained calm and behaved very differently. The more the money you had made in this bull run, the bigger the hit that you've taken because your appetite for risk also went up. People kept on putting more money as the market went up, which is a common thing that happens in the equity market." But this time around the magnitude was much bigger; the profits were huge and so were the losses as the Sensex plummeted from 12600 levels towards 9200.

On the kind of money that people have lost, he says, "Most people are set back by a good 18-24 months; I would say the last one year's profits are definitely gone for most investors."

To add insult to injury, those who entered late and at high valuations have taken a dent on their capital. "There are so many distress stories around, a lot of people had put in whatever money they had in the market, others had invested on borrowed money as leveraging has become a norm now." He adds that while many investors and traders are now blaming the system or the quantum of margins, "I feel there is nothing wrong with the system, it is the way one uses, or rather abuses, the system that is wrong."

On what his advice to his clients is at this moment, Rege says, "This may not be the best of times to advise people because they have been battered so badly that it is difficult to go out and talk to anybody. What people have faced is a huge emotional exhaustion, and the repair work is going to take a long, long time... "

Jhaveri's firm, which has nearly 80 families in its client list, with most coming from the salaried classes, has also had to handle anxious calls. But the difference has been that his clients are `Financial Planning clients' and not "pure investment-oriented clients. I am their financial doctor. It would be wrong to say my clients were not concerned, but none of them have panicked in this situation."

This is due to two main reasons, he explains. First of all, only clients with long-term goals have equity investments and these have been told that during this period — between 5 to 25 years — "they would intermittently see 20 per cent, and sometimes as high as 30-40 per cent swings in their portfolio, and hence were prepared for volatility."

The second reason, he adds, is that through the use of "simple risk control techniques, which we explain to our clients, while the broad markets were down by almost 30 per cent from their peaks, our client portfolios are down in the range of 1-16 per cent at the maximum (as per June 2 valuations). Our clients were happy to earn returns in the range of 30-60 per cent safely versus gunning for 100 per cent or more with very high risk and volatility."

But this doesn't mean that lots of people haven't lost money in this carnage, he adds. "We received hundreds of e-mails from concerned investors. Many have lost 75 per cent of the money they had invested," some of them money borrowed at high interest rates. Three weeks ago they were making profits, but suddenly are facing losses. "They will now have to take more loans to first clear off losses and then repay the original loans; I could go on and on with loss stories," adds Jhaveri.

Long-term story intact

So what should investors do during these difficult times?

Says George, "We've been telling them from the beginning that this is a long-term instrument and if there is nothing wrong with the Indian companies they own, or the Indian economy and country as a whole, and if the market is still going down because of technical factors, investors should wait and watch. We have seen this in the past too... markets falling due to technical reasons and then bouncing back. If the fundamentals are fine and the FIIs are selling today, tomorrow new ones will come. I see no problem for long-term investors."

But short traders and those who invest on borrowed money... "I'd say these have become a risky group in the entire system... they have really burned their fingers and will disappear for some time. But I fear that tomorrow, if the market goes up, they will again return with borrowed money. That will continue and is dangerous. But if you invest systematically and with your own money, you can afford to wait."

He also feels that brokers too should take some responsibility for investors losing money. "They... and also the entire market system... should make the effort to educate investors that they should invest for the long term."

As for the days ahead, George says, "As long as global capital flows are unrestricted and as long as Indian economy and Indian companies do well, there is nothing to worry for the equity market; it should bounce back. I'll change my views if the fundamentals change. Remain calm... and see how the companies are performing, look at the first quarter results and then take a call."

Jhaveri's tips for the long term

If you don't understand something, ask for help.

Devote time and learn financial management. Take educational courses, gain knowledge, and understand the consequence before acting.

If you don't have patience, capitalise on others' expertise. If you can hire lawyers, chartered accountants, doctors etc for their services, why do you want to risk your hard earned money? Invest time to talk to 10, 20 or even 30 experts and finally choose one you are comfortable with. Is this too much time to spend for a lifetime of peace and financial control? Just invest this time once.

Beware of product-driven agents and brokers. It is easy to identify them — ask what is the best investment and within 5-10 minutes of meeting you if they jump into any product demonstration, just press the eject button and don't waste any further time. Meet the next person.

Response may be sent to rasheeda@thehindu.co.in

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