Top ten questions about stock investing-2012

Top ten questions about stock investing-2012




Top 10 queries of stock investors answered by stockinvest.in


From a booming global economy to the depth of gloomy recession has left stock market investors jittery and with huge portfolio losses. Stockinvest.in has tried to address and answer the top ten questions on the mind of investors.


Q1: When will the stock markets recover from the impact of global recession?


Ans: No one can give the exact answer to this question, only a reasonable estimate can be made. It is clear there is not going to be a V shaped recovery in the stock markets. The stock market will test its bottom couple of times and a gradual U shaped recovery will begin after the dust in financial markets settles down.


The ongoing worldwide financial turmoil is a creation of many years of monetary and financial mismanagement. And it will take some time for the issues to be resolved. At the present no immediate relief is in sight.


In the short run the stock markets are going to be volatile giving a few hundred points jump on both sides. The current gloomy scenario points more towards a downside rather than a positive breakout.

The stocks of good companies with solid business and great managements have also been beaten down to unrealistic levels along with unreliable companies and they make a good investment for long term investors.


Those who invest in the stocks of companies with good management and credentials will be grateful for this downturn in the economy and earn good money on their investments in the long run.




Q2: Are people going to stop investing in stocks in the future?


Ans: Investing is about creating monetary security for your future needs and desires. As long as we have these needs and desires investing in equity will continue as no asset class offers better returns than the equity market. This is a historically proven fact.
.


Q3: How badly will the global recession affect India?


Ans: Indian economy is not insulated or decoupled from the global economy. Although India has its own internal market and consumers which will sustain demand to certain extent but overall global scene affects the country to a great extent.


India’s weak internal like poor infrastructure, old technology, lack of investors along with issues like weak governance, rampant corruption, terrorism have the potential to derail the country's growth rate.


On the other hand India also has multiple engines of growth e.g. poor infrastructure also means increased spending on infrastructure, causing growth in related industries and since India is less dependent on developed countries for economic growth it follows that India will tackle the downturn better than most other nations.


Q4: How does this downturn in the economy affect the earnings of companies?

Ans: The earnings growth and profits of Indian companies is going to come down from the earlier expectations. The crisis and its impact on Indian companies have been more severe than what was initially estimated. The sharp depreciation in the value of rupee has  led to companies reporting earnings loss.


While such losses are notional and will reverse with the reversal of the currency (i.e., appreciation), the fact is that these will have a bearing on the companies' FY09 earnings and beyond.


Then, companies have also been impacted due to a severe tightening of liquidity and strain on their working capital financing. This has led to delays in manufacturing and lost sales opportunities.


Analysts have revised the target stock prices of companies in view of the earning loss.


Q5: Should investors buy large-caps, mid-caps or small-caps’ stock?


Ans: The allocation of large, mid and small cap companies in an investor's portfolio is  based on several factors like investor's age, risk profile and investment tenure.
While a higher allocation to large and mid cap stocks is best suited to investors belonging to the middle age category and with a lower risk profile, higher allocation to mid and small cap stocks is best suited to investors belonging to the younger age category and with a high risk profile.


However, it is important to make sure that a single stock (whether large, mid or small cap) must not form a large chunk of a portfolio.


Generally, a stock should not form more than 5 to 6 per cent of one's portfolio. The portfolio, as a whole, should be well diversified.


Q6: Is it a good time to invest now or should one wait for the bottom?

Ans: No one and I repeat no one has ever been able to predict the top or the bottom of a stock market cycle. An analysis of the history of the stock markets has revealed that different bear markets have bottomed out at different times and there has emerged no definitive trend on the same.


Hence, an attempt to time the market or in other words, 'waiting for the markets to bottom out and then start investing' is not likely to prove successful.


Efforts should be made instead to look for stocks that are trading well below intrinsic values and then wait patiently for as long as as 3-5 years for the market price to converge with the intrinsic value of the stock.


Q7: Should I sell my stock holdings now?


Ans: If you believe that you hold stock of a company, which has the capability to deliver value in the long term, is down because the markets are down then the answer is don’t sell.


But if you think that you made a wrong choice in the first place and there is no point buying more of a troubled company at lower prices just to average your cost then you should sell.


Ultimately, the decision to 'sell' a stock should not be determined by the market sentiments but by the investor's assessment of the valuation of the stock.


Q8: All stocks are trading near their 52 week bottom, so which stocks should I buy?


Ans: The intrinsic value of any asset, be it stocks, bonds or real estate is nothing but the discounted value of cash flows that can be taken out of the asset from now until eternity. This method of valuation is popularly known as the DCF method.


Hence, the DCF analysis should be performed on stocks that the investor considers cheap and consider investing in those that give the maximum upside with respect to their market prices.


However, we would like to add that future cash flows are a function of factors like the company's balance sheet, its management and most importantly, its competitive advantage.


Hence, these factors need to be carefully evaluated while arriving at the future cash earnings of the company and thereby its intrinsic value


Q9: What about investing in commodities such as gold?


Ans: With the global meltdown the commodity prices are also heading south. In a global slowdown consumption is reduced and demand for commodities falls.


 Gold is a good hedge against rising inflation. However, unlike good quality stocks that pay dividends or bonds that pay out interest every year, returns from investment in gold can only accrue from the sale of the asset.


Thus, there is no income to fall back upon if the market for gold remains non-conducive for years at a stretch. Hence, exposure to gold in one's asset allocation should be limited and not more than 5 per cent of the total assets in our view.




Q10: Should I borrow and buy stocks since the stock market has corrected almost 60 percent?
Ans: A big No is my a