Picture an old-school person like your grandfather. Try and reminisce how he dealt with money. Money would be kept in a steel Safe-locker and he always knew exactly how much money he had in it. In the good Old days, bank deposits were the only investments for the middle class. The bank deposits would all be tabulated neatly in the order of their renewal dates. Monitoring would be perfect. Everything worked like clockwork and money would be in a very orderly way. Discipline and caution were the buzz words and things were always kept simple in the way they handled money.
Contrast this with how money is handled in the present. We invest in several products like Stocks, Mutual funds, ULIP’s and bonds besides the traditional bank deposits. On the one hand, we invest in several options for the purpose of saving on taxes. On the other hand we borrow to spend on credit cards. We even buy homes with home loans so that we can save on taxes. Clearly, the way in which we deal with money is far more complicated that they were in the good old days. When we borrow and lend at the same time, we need to balance our finances and constantly keep watch so that they are within limits.
With so many product options and multiple financial goals like life insurance, health insurance, tax savings, home buys and equity investments we have clearly complicated our handling of money. As different times call for different approaches, we are left with limited options but to create a wider basket of financial products. That has given rise to a portfolio. Your portfolio includes all the financial products you have bought and maintain on a running basis.
But, do we really know what we own and manage our portfolio in a methodical way? In the race for time and against it, we hardly find the time to devote to financial matters. We mostly rush to fulfill specific needs at the last hour and forget about them after that. More importantly, we do not have the big picture nor do we routinely tabulate, monitor or review our money matters. The portfolio itself is only in our memory and hardly organized and tabulated. This clearly leads to lapses, oversight and loss of opportunity.
This is where the old school approach of Taking Stock will make a big difference to the way we handle money. If you have a way of arranging your finances, you are actually preparing yourself for bigger things. Wealth creation happens only when we arrange, manage and take stock of our finances periodically. Taking stock of your wealth gives you a deeper understanding of what you assets you need to own, how you need to grow your money and also the risks you are taking to achieve your financial goals.
Today, most of us are simply letting things be. We are hoping for some random decision to work miracles for us. Miracles with money are a rarity. The richest investors are the most systematic people. They constantly take stock of their decisions and finances and tailor them to achieve their goals. While each of us have our own finances and make our own decisions, we should start taking stock regularly. Start tabulating your portfolio and take stock of it regularly. Wealth will soon follow.
The influx of FII money into India doesnt seem like ebbing. The index is close to 6200 at the time of writing. As you read this , the markets may well be trading at an all time high. You must be wondering what you should do in the stock markets. If you sold out early , then the feeling of being left out must be troubling you no end. To the investor caught out of the markets , the IPO rush seems to be enticing. If you are still holding stocks , it is time to decide when to sell.
Decision making always works well when the macro environment and the investment sentiment is sized up properly. Let us try and run through the various factors that will drive the markets in the near term.
The markets will be completely fund flow driven in the near future. FII’s continue to invest in India and the rush of money is increasingly concentrated on index stocks. This is mainly on account of a trend among overseas investors to prefer India centric ETF’s ( exchange traded funds ). This has resulted in the valuations of the Index becoming a tad stretched and we do see PE multiples in excess of 25 in several index stocks. The overall index multiple is lower only on account of the under performance of RIL , our index bell weather stock. It is a matter of time before RIL also performs in line with the other stocks and one will see this happen in the near term. When the underperforming scrips in an Index also deliver and align with the rest of the Index, the overall PE of the index will hit all time highs. At that level , i expect money to again start chasing value in mid caps and in the oncoming IPO’s. Their valuations will need close scrutiny and considered evaluation on a case to case basis.
The timing of several large IPO’s during the festive season clearly indicates that we are going to see strong participation in them. Most of those left out of this boom will seek out the IPO’s to get back into the markets. Clearly sentiment will favour IPO. But, i will advice caution and selectivity in choosing issues. Valuations of IPO’s seem stretched and issue pricing already factors in good performance by the issuing companies. The prices discount FY 12 earnings at healthy multiples. Therefore , it is imperative for the investor to be selective while investing in IPO’s. It certainly is time to be very cautious.
Mid caps continue to perform well and business fundamentals are robust in several sectors like auto ancillaries, engineering , consumer durables etc. But, one should appreciate that in several midcaps the valuations are quite steep and already factor in good performance. Therefore , one must book profits where the valuations have run way ahead of earnings. In mid caps which are trading at multiples in excess of 20, it maybe a safe strategy to sell and go into cash.
Overall , you must now be building your cash chest . Selectivity is critical in choosing new investment ideas. The liquidity driven rise of the market will ultimately turn when flows slow down or when the inflows do not match the capital requirement of the issuing companies. I believe that the never ending appetite of Indian companies to raise money will ultimately lead to a correction. The money that FII’s are putting in will get quickly absorbed and any reversal of FII flows will ultimately lead to a sharp crash in Indian stock markets. Clearly, sobriety is the need of the hour.