Gain from an invest-and-hold strategy

The boom show has just begun PUNEET JAIN

The Economic Times MONDAY, JANUARY 12, 2004

India is beginning to discover a new bull market. The all-important question at this point could be: How long will the good times last? While a definitive answer is difficult, at present one could say that the immediate future appears pretty promising. We could also look at the behaviour of other major markets to decipher what the future might hold. Indian market's movement is similar to the patterns exhibited by more developed markets like the US where Dow Jones Industrial Average (DJIA) saw an almost secular and uninterrupted bull run from a level of 800 points in June '82 until it crossed high of 11500 points in January 2000. This was an almost 15-fold rise in the index.

Interestingly, the DJIA stagnated at the sub-1000 level for almost 16 years preceding this period of boom. Compare this with the Indian situation where we have seen the BSE sensex stagnate for the past 10 years. If the markets do get a re-rating, then the recent two-fold rise may be only the beginning of a long boom. However, investors need to remember that we are talking of markets over a long span of time. In the very short term, as stock indices trend higher, volatility in markets will increase. Thus, short-term trading will become more hazardous, while long-term investors could gain from an invest-and-hold strategy. The trigger for the current boom is provided by improved corporate fundamentals and huge money being poured into India by foreign investors. Both the props are fairly solid and can sustain the uptrend in the market for long time.

A big positive about the FII participation in Indian markets is that we are witnessing very large turnover by these institutions. The FII trading volumes over the past few days have been almost 30% of the total cash market volumes. The buying and selling is equally vigorous indicating that there is healthy profit-booking by those FIIs who had bought stocks earlier. Buying is led by new money pouring into the markets. Such a smooth exit for early investors will induce higher confidence among investors and should attract more money in the months ahead. The large FII turnover now suggests that the depth of the market has increased handsomely and more players can participate in the markets. Therefore, it appears that the outlook remains fairly bright for the next few months, atleast.

Stock markets continue their gravity-defying climb even as most old-fashioned academicians would warn you of the dangers lurking behind every barrel of crude. This disdain with which equity markets repeatedly demolish every shade of conventional wisdom is what gives them a special status among all financial markets. puneet.jain@timesgroup.com MONDAY, OCTOBER 11, 2004