Surviving a bear market

Though there is no clear definition of a bear market, in India such phases have lasted anywhere from 56 weeks to 84 weeks, with the market losing between 41% and 57% from the peak levels. Here are some ways to survive the meltdown.
Non-equity investments
With equity losing steam, investors are looking to park their money in cash, fixed deposits and real estate. Among these, cash is the favoured option despite the low returns that it offers. Though some may look at gold as an alternate investment, it does not have any correlation with equities and should be an investment irrespective of the direction the market takes. Here is what the non-equity options offer and the things that one must keep in mind while investing in them.
Cash
Safe haven in short term.
Returns from cash and cash equivalents are very low.
Cash funds are generally safe, but during the credit crunch of 2008, even they felt the heat.
Remember
Falling interest rates affect returns.
Cash funds carry a credit risk.
Rising inflation reduces the value of the cash holding.
Property
Falling interest rates mean cheaper borrowing.
Rentals provide steady source of income.
Less risky than equities, but more risky than FDs.
Remember
Property prices could be as volatile as equities.
High prices mean that rental yields are very low.
Difficult to sell quickly.
Fixed deposits
Low-risk option.
Provide steady source of income.
Diverse options and maturities:
- Govt bonds, bank or corporate FDs
- Short-, medium- and long-term
Remember
If interest rates rise, investor loses out.
It's best to invest in bonds of varying terms.
There's a credit risk if bank or company goes bust.
Inflation eats into the value of investment.
Equity investing strategy in bear markets
Having suffered heavy losses in stocks, many investors want to keep off equities. But there are ways in which you can invest in stocks with minimal risk. Investing in dividend yield stocks, defensive sectors and funds with holdings across market capitalisations can help make money in a volatile market.
Dividend yield stocks
Depressed share prices push up dividend yields.
Dividends can compensate for the fall in share prices.
The dividend yield acts as a cushion, preventing the share price to fall beyond a point.
Remember
Dividends and payout ratio are not guaranteed.
Very high dividend yield could be because the share price has been beaten down.
Rising interest rates make bonds more attractive because they carry less risk.
Defensive sectors
Some sectors fare better during bear markets:
-Utilities
-Pharmaceutical
-Oil companies
-FMCG, tobacco manufacturers
Utility companies pay generous dividends, which help sustain share prices.
Remember
Most sectors tend to move in cycles.
Sectoral funds allow focused diversification. But understand a fund's objectives before investing.
For instance, a pharma fund could be investing in risky bio-tech companies.
Five alerts to detect bear market bottom:
1. Cash is king: At the bottom of a bear market, everyone agrees that cash is the best place for your money. Even fund managers hold stacks of cash. This money eventually enters the market, starting the next bull run.
2. Value is easy to find: PE ratios will be near historical lows. The average dividend yield will be high and share prices may be lower than book value. On 1 Jan 2003, the Sensex PE was 14.7, when the index was at 3,390.
3. Falling interest rates: Interest rates usually start falling at the end of a bear market. Lower interest rates eventually revive economic activity.
4. IPO drought: There are very few new issues (IPOs) at the bottom of the bear markets. Promoters prefer to wait for the market sentiment to revive before they go public in order to get a higher value for their companies.
5. Liquidity increases: Broad money supply tends to increase at the turn of the bear market. Money is the lifeblood of the economy. Increased supply tends to push up asset prices.


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5 investing mistakes to avoid in 2009

For many investors, 2008 was a nightmare that came true. After four years of boom, when the tables turned, it wiped out lakhs of crores (trillions) of investors' wealth.
Last December, there would have been a smile on everyone's face. While the United States had started feeling the pinch of the sub prime crisis, many experts claimed that India was decoupled from what was happening there. Well, it took just one month to change the scenario.
On January 21, in a matter of hours the benchmark indices, Sensex and Nifty, hit the lower circuits. And in the next 11 months, there have been few moments of pleasure for the stock market investor.
Both the indices are down over 50 per cent. But depending on portfolio, some investors have even lost 80-85 per cent.
As the year-end approaches, let's look at some of the mistakes that many investors made during the last year and hopefully, refrain from making them again.
1. Over-leveraging
Buying stocks with borrowed money is leveraging. And it is a crime that many investors committed last year.
Typically, a broker either lends or allows the investor to have a larger position than the money that has been deposited. The interest rate on such lending is higher. Consider this, often an investor has Rs 1 lakh and has positions in the market four to five times of that.
When things are good and stock prices are rising to dizzying levels, everyone is happy. The return on investment outstrips the interest cost. But when the market falls, it is a complete disaster.
For instance, when Reliance Industries was trading at Rs 2,500, you bought stocks worth Rs 4 lakh (Rs 400,000) on an initial capital of Rs 1 lakh (Rs 100,000). If the stock moves to Rs 2,700, it has gone up by only 8 per cent, but the return on investment (Rs 1 lakh) is 32 per cent.
Now if the stock dips to Rs 2,000, down 20 per cent, you stand to lose 80 per cent. Now if you add the interest cost to the total capital loss, then the initial capital might have been wiped out.
Lesson: Multiplier effect has both sides. Use the loan facility very responsibly and with stringent limits to it.
2. Averaging effect
Whenever stock markets start falling, the initial reaction from investors is to buy more. The idea being that there would be cost averaging.
However, when a slide like this happens, this should be the last thing on your mind. It's because while you may have brought down the acquisition cost, a lot of money has gone into this process. It is almost like throwing good money after bad money.
Often, this happens when one refuses to believe that things are turning sour and the recovery would take a long, long time.
Lesson: Emotional attachment to a stock can be very damaging. If you have made the mistake of buying shares at higher price, don't multiply it by buying them at every low.
3. Investing on tips or rumours
Many investors can be accused of this one. But things can go real bad sometimes. This is especially true with mid- and-small-cap stocks.
There are hundreds of examples where tips are given for penny stocks or Z category stocks. Initially, it may give you some money. In the long run, however, such investing tactics can be fatal.
Lesson: Just ignore.
4. Derivatives play
For a lay investor, this is a definite no. As investing guru Warrant Buffet had once said, derivatives are 'financial weapons of mass destruction'.
A large number of small investors used the derivatives route to invest rather than the cash segment. It was easy since futures and options allowed them to take positions on either side (long or short) with little over 20 per cent margin or little option premium.
But since they have to pay only 20 per cent, bigger risks are taken. That is, small losses are not booked. Instead, positions are rolled on in the hope that ultimately things would favour them.
No wonder, losses keep mounting and can really hurt sometimes. For example, it is better to buy futures at Rs 25 and book profits around 25.5 or 26 levels, effectively earning 10-20 per cent return on the margin amount. However, keeping the position open even while losing can be disastrous.
Lesson: Derivatives are not an investment tool but a hedging mechanism. So either don't use it or use only after you equip yourself with its pros and cons.
5. IPO investment
On an average, during boom times, initial public offerings (IPOs) of companies are oversubscribed by 40-50 times. As a result, investors use the IPO route to make quick money.
That is, on the day of listing they simply book profits. For many, it is a sure shot mantra for quick money.
But when the scrip lists lower than the offer price, getting stuck is very much possible. And if someone has taken a loan and applied for the IPO then things could get real bad. Investors who invested using IPO funding facility get hurt the most.
Long-term IPO investors may still make a decent return over a long run, but subscribe and sell on first day is out of sight at the moment.
Lesson: Invest in IPOs only when you believe in the company. Otherwise, just stay away.
Investors should realise that making money is a long-term process. However, in their attempt to make a quick buck, many suffer. In 2009, make sure that these mistakes will not be repeated.
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New payment system for IPOs by Aug 10: Bhave

A new payment system for Initial Public Offers that is aimed at not blocking investors' money till share are actually allotted will be launched as a pilot by August 10, stock market regulator SEBI said on Tuesday.
"Hopefully by end of August, we will start the pilot project," SEBI Chairman C B Bhave told reporters on the sidelines of a seminar on financial planning.
Initially, both the existing system of payment for public issues and the new alternate system will co-exist.
"We really don't know how the system works. We need to get used to it. We have to sort out glitches if there are any in the beginning," Bhave said.