When market goes up everything goes up irrespective of their valuations and fundamentals. Investors chase every new IPO that comes to the market and they chase with expectations that it will go up multifold in short term. No body talks of fundamentals or valuations when markets inch up everyday. Indian markets were on mad run for very long time.
Most of the time only positive stories emerge and no one cares about negative sentiment at all.
You will not be called smart, if you make money when the market goes up. You will also be not called looser, if the market goes down. However, you are definetly smarter, if you make money when most of them out their loose money. I am not pointing or advising shorting the stocks here.
Investing is an art and every investor should have his own investing style. Please don’t go and pick up every stock that is going up or don’t pay attention to message boards where people pump up the stocks and also, don’t pay attention to Technical analysts in a downtrend market.
I would advise these steps to safe guard yourself from losses.
1) Pick up a sector or two and learn about it thoroughly. Look at it from national and international point of view.
2) Pay attention to Fundamental analysts and then Technical analysts. Technical analysis by itself is very dangerous, if you ignore fundamentals of the company.
3) Before you zero in on a company, look at the management which is running the show. See, if they have good track record in giving good returns to their shareholders in the past.
4) Don’t have lofty expectations on the stocks you invest in. Be reasonable and expect only reasonable returns (15%).
5) Monitor closely where the government is spending most of its tax money. Invest in those companies who will get these government orders.
6) Avoid companies with unreasonable PE’s.
When markets go down all stocks go down including good stocks. This is an oppurtunity for value picks.
I strongly recommend companies who do business in India and generate their revenues from Indian consumers. Why?
Indian currency is going to appreciate in coming years which increases the purchasing power of Indians. Foreign currencies mainly US dollar will be on a downward trend and Indian companies which are heavily dependent on Dollar revenue will be loosing their earnings due to currency rate fluctuations. Companies like Infosys, Wipro, TCS etc will be loosers, becuase their earnings are dollar denominated and are also facing pressure on their margins due to heavy competition from US companies and also Indian companies.
I recommand Hotel stocks, Paper companies (like bilt), Infrastructure companies, cement companies etc.
Avoid Sugar companies for few more quarters. The only scope for short term increase in their valuations may come from Ethanol story or if the sugarcrane crop in Brazil suffers due to unfavorable weather conditions or if the crude oil per barrel jumps to $100 in 2008. Invest in companies who offer Insurance services and also in companies like Apollo hospitals.
Note: I have invested in Hotel sector and planning to take more exposure in this sector due upcomming commonwealth games in 2010 and increased tourism prospects in India. Also with real estate value increasing, there is a huge entry barrier for new companies.