>PERILS OF TIMING THE MARKET

The equity markets continued to build on the gains of January 2012 in February also. Many common investors missed out on the rally because they were waiting on the sidelines either in a bid to time the market or because they were simply petrified by a slew of negative news flow globally.


Timing the market is an obsession with many common investors or even some institutional investors. However, many successful fund managers and investment gurus do not worry too much about timing the market but rather focus on stock picking and valuations. Since inception of their funds, Warren Buffet and one of the most successful fund managers in India (Prashant Jain of HDFC Mutual Fund in case of HDFC Prudence Fund since 1994) have given close to 20% annualised returns over a period of decades without worrying about timing the market.


As they say, it is not about timing the market but the time in the market that really matters to the equity investors. And the equity market has its own ways to remind the same to investors. The recent sharp rally is a case in point.


No doubt, the equity market can test your conviction in the near term but investment decisions made at right valuations in quality stocks tend to generate healthy returns over a longer period of time. Analysis of the past data suggests that the market has given returns of over 100% in a period of three years if the investments were made at multiples of below 12x one-year forward earnings (one can adjust the consensus estimate to factor in the potential earnings downgrades).


After the sharp rally in the past two months, the major excesses of the pessimism in the valuations have been filled up now. Our research team points out that the Sensex’ multiple has moved up from just below 12x forward earnings to over 14x forward earnings and is only at a slight discount to the long-term average multiple of around 14.8-15x one-year forward earnings. From here on, the market’s re-rating will depend upon the domestic triggers, such as policy push and the Reserve Bank of India’s stance on the pace of monetary easing.


Do not rue the missed opportunity. The market seems to be taking a break to digest the sharp gains of the past two months and is waiting for the outcome of the major policy related events scheduled for this month. Moreover, there is always value to be explored in the broader market. There are still many quality stocks available at discounted valuations. Our research team’s endeavour is to help you identify some of these stocks that have a secular growth story and are available at reasonable valuations.


To read full report: PERILS OF TIMING THE MARKET
RISH TRADER