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Sunday, July 31, 2005

Caution and control — watchwords for the small investor: Mr Sandeep Shenoy, Strategist, Pioneer Intermediaries Pvt Ltd


Those who make consistent money are those who are consistent, patient and logical. Any successful global investor will tell you making money is very mediocre business. It doesn't give you excitement. If you want action and excitement, go to a casino.

WHETHER "a structural bull run" or not, this is the time for the ordinary retail investor in equity to be very cautious, says Mr Sandeep Shenoy, Strategist, Pioneer Intermediaries Pvt Ltd, Mumbai.

In an interview to Business Line he said: "In the stock markets a select minority makes money, not the majority. Even in that minority a very select minority makes consistent money... So when the slide comes, the majority will lose money."

Excerpts from the interview

The equity market is touching one high after another. What should small or retail investors do now?

When a structural run starts, everyone makes money; so it is very easy for retail players and mutual funds to make money. But today, with Sensex at 7,400, if you ask is there much upside, I'd say no, perhaps beyond 5 per cent.

The market is fairly valued, finely balanced and discounting a very good year of earnings down the line. What can go wrong for a retail investor? One, a retail investor is generally the last one to know any adverse corporate development and unable to exit in time. Two, the flow of capital; investors always want to go in for low-cost shares. Koi dus rupiya ya bees rupiyewali cheez batao... (show me a Rs 10 or Rs 20 stock). But cheap at this level may not be the best. They think they'll lose only Rs 20 per share, but think percentage wise... in a Tata Steel or Reliance perhaps 5 per cent of your capital may be at risk, but here, all of it could disappear. So you're going against the basic tenet of investment philosophy.

A small investor is one whose capital is earned the hard way. When he buys a mobile or fridge or jewellery, he makes 20 inquiries for a Rs 20,000 commitment. But the same person will commit Rs 5 lakh to a stock without thinking, and do so even by borrowing because he got a tip from a cousin's friend or somebody in a bus. Three times he might make money but the fourth time when he loses, his entire capital could get wiped out along with the gains.

But people say this time is different...

Oh, we've heard that before; this time people are smarter, they've learnt their lessons, this time the money is real and it's a structural bull run. But if you open a 1929 newspaper, you'd see the same stories in the US... or in India before 1992 and the Harshad Mehta scam or the 1999 technology boom.

So investors don't learn...

No, it is investor psychology. In the stock markets, a select minority makes money; the majority never makes money. Even in that minority a very select minority makes consistent money. If everybody is making money, I'd classify that market as inefficient. When the slide comes, the majority will lose money.

So what does the average investor do?

On a holistic basis, when you make enough money, get out of the stock market and into other avenues such as real-estate or precious metals and wait your time out. The biggest virtue one can have is control over one's emotions. "I've made money let me stay out of the market. Patience is a game... but then my neighbour or friend has made money; whether he really has made money or not, nobody knows. If he's still staying in the same house and riding the same scooter for years, he couldn't have made that kind of money."

But when you think other people have made money you try to get into the market and it becomes a vicious circle. People enter penny stocks... Ranbaxy is Rs 1,000; I can buy only one. But I can buy 100 shares of ABC Pharma. That too might go up but Ranbaxy has a strong underlying business... this company doesn't. Companies may not exist, may not pay salaries and yet (their stocks) move up substantially.

So this is the time for caution and control...

Absolutely, but people become greedy. When you become greedy, you over-reach yourself and play blind, it is a question of time before you get hit.

People say the government should do this or that, but in a free market you are responsible for your own money. After what happened in 1992, and 1999-2000, we assume people would have become intelligent...

But people have short memories...

Then you have yourself to blame. A small investor should be very careful. Who makes money in the market? The intelligent, but they also lose money.

But those who make consistent money are those who are consistent, patient and logical. That doesn't change with time. Those who sat over their investment over a few years have made consistent and big money. If you want to do this, buy into a good stock after logical study. If you're not well equipped to do that and don't have the ability to sift chaff from wheat, this is no place for you. Then it becomes gambling and you're better off putting your money on horses.

Any successful global investor will tell you making money is very mediocre business. It doesn't give you excitement. If you want action and excitement, go to a casino.

Even in the analyst community there is so much pressure to be different and recommend different stocks. But investment has only basic logic and a few criteria — cash flow, earnings, growth and ability to manage working capital. Just as a human being requires protein, carbohydrates, vitamins, etc for nourishment — these can come from different sources but you can't eat iron ore, aluminium or steel. The same is true for good stocks. The market either underplays or overplays any development; when it underplays, get in and when it overplays have the guts to say, `this high price is illogical, I don't understand it', and get out. If somebody else understands it, good for them. But the temptation and the courage to say this are rare to come by.

What kind of returns should equity investors expect and in what sectors?

Let us not look at 100 per cent return; 15 to 20 per cent is good enough. As for sectors, people travel all the time and even dingy lodges on Anna Salai in Chennai are now charging Rs 600 a day. You can't get hotel rooms in Bangalore. So invest in the demand-supply mismatch in the hotel industry. Second, believe in the strength of the Indian middle-class. Everybody is building houses, and buying vehicles, at least two wheelers.

The logic is simple if you apply your mind. The demand for sugar is growing and though cheaper stocks are available, you can't go wrong with an EID Parry or KCP Sugar. Or a Tata Steel in the steel sector even if the prices are coming down. The smaller and cheaper companies may give better returns but unless you are really clued into their business or have strong linkage with the company to cash in at the right time, or belong to a class of investors who have evolved and gone through a couple of cycles, stick to good companies and be happy with 15 to 20 per cent return.

What about banking?

Yes, but look at where the real growth will come. People like you and me will have 10 banks such as Citibank chasing us, but who'll look at your servant's husband who wants to buy a scooter? An IOB or Allahabad bank, the second rung PSU banks. He might be a risk at 14 per cent, but still Allahabad Bank will make more than twice the interest it gives to depositors. And we know the bigger people default more than the smaller ones.

Do you see any signs of a scam?

Whenever a rally starts, we always say this time it is clean; but more than the mainline stocks when the entire mid-cap story reverses a lot of people will be hurt. But more than scam, I think it is a bubble that has built up; of the 450 companies in the sector 40 or 50 are good, but the other 200 are absolute trash. You should have the guts to say what's happening is absolutely wrong and stay away or get out. There may or may not be a scam, we don't know. But there is a lot of liquidity in the market. Most of the scams originated because of lack of liquidity and the money had to be tapped from the banks.

Today, money is available freely. Rs 40-50 lakh housing loans were difficult five years ago, but today you'll get 10 offers. Somebody might tell you instead of Rs 20 lakh, take Rs 30 lakh; buy a car and put Rs 5 lakh in the market. Such a thing could be happening, but we don't know. But there is too much money floating around, the mining, metals, manufacturing and agricultural boom has put a lot of money in the hands of traders and farmers. And believe me, they are people who drive the market, not us.

What about MFs? Is it time to book profits?

I may be wrong about this, but one got an inkling that the IT boom is coming to an end when 10 Technology funds were launched; today everybody is launching mid-cap funds. Rs 700 to 800 crore going into mid-caps will certainly drive the prices up. But I feel we're at the end of the mid-cap rally... maybe in another 4 to 5 months. It doesn't require rocket science to fathom that!

I'd ask investors to be careful; it is not as if the MFs or fund managers are bad; too many people are pumping money into a sector. One problem in a company can end the whole thing; the fund might be good but can it sell Rs 600 crore stock and get out? No. But if it has the flexibility to move into a Tata Steel or large caps, that's okay. Stay invested in such flexible funds rather than focussed funds. Focussed funds should be invested in during bear phases.

So should investors book profits?

Nobody has ever died booking profits.

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