Friday, 11 February, 2011

Start using the "Buying Opportunity"

Start using the "Buying Opportunity"

Hi folks!

On January 23, 2011, I'd posted this entry on these very pages:

On January 24, Nifty closed at around 5740, Sensex closed at around 19,150.

I certainly hope that at least some of you loaded yourself with enough cash.

Since then, markets have come down by around 10%. However, individual stocks, including some high quality scrips have tanked well over 20%. A couple of juicier ones have virtually crashed.

As on date, Nifty is around 5250 and Sensex around 17460.

This blog is not to bloat. After all, while I might have got my predictions right on this occasion, there are enough other instances where I've gone horribly wrong.

Right now, things appear to be quite bleak. Chances are bright, you'll be scared to deploy your funds at this juncture.

Here are a few reasons as to why you should consider to begin the process of reducing your cash levels and buy high quality stocks for the long term:

  • Valuation metrics have become far better in terms of PE, Price to book, etc.
  • There seems to be a fear psychosis, with a scam every other day.
  • Nobody is interested in buying.
  • Global economies have begun to recover.
  • Political uncertainty in places like Egypt are reducing, and things seem to be limping back to normal.
  • Technically, we're becoming to look increasingly oversold.
  • The Union Budget is round the corner. In the coming few weeks,
    • To enable middle classes to handle inflation, some of the tax-payer friendly portions of the Direct Tax Code may be implemented right away
    • IT Exemption levels may be liberalised, for instance
    • A few reform measures would be announced
    • A few divestment proposals would be announced
    • Some clarity will emerge on the spectrum scam
  • The discomfort of holding cash as cash for long periods of time will prompt many investors to suddenly start buying shares again

All the above reasons will, sooner than later, push the indices back to much higher levels.

It would be a prudent idea to deploy your cash in a staggered way.

As always, buying it all at one go may not be a great idea. Hence the suggestion to go about it in a staggered manner.

However, Beware. None of the reasons that I'd mentioned in the earlier post (Many reasons why you need to be ready for a nice, juicy, sudden Market Crash!) have not vanished completely.

When the stocks go up, be prepared to once again book profits and increase cash levels once more for a virtual "Action Replay"! My own guess is that there will be fairly violent market swings in 2011, thus providing such trading opportunities.

Unfortunately for the real text-book-driven long-term investors, 2011 is going to be rather difficult. A buy and hold strategy is unlikely to work!



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