Is it the right time to pick up stocks?

One basic rule for making money in the stock market is to buy low and sell high. No, we are not suggesting, you go on a shopping spree and pick up stocks randomly, but yes, this definitely means that with some discretion you can still ensure profitability from this market.

 

Prepare for the long haul: If you are an investor looking to make a quick buck, then this is neither the time nor the place. To make any sort of profit in this market, you need to be prepared to wait this out for three years or so. The market at the present moment is little under 10K and still wildly fluctuating. This means, there is little chance of a major upswing in the near future. At the very least, it will take a year or so to stabilise this situation (optimistically). Apart from the global economic crisis, there is also the battle with inflation to be taken into account. All things considered, only a patient investor can ride this storm out. It would help of course, if you have taken care of certain basic investments (life and medical insurance).

 

Look at the PE ratio: Now that you've decided to stick it out for a long period, you need to look at what stocks to pick. A good place to start with is to look at the PE ratio (Price to Earnings ratio) of various companies. As of now, the PE ratio of nearly half the companies listed on the Sensex is less than 10. In the past, Indian markets have traded in a PE ratio in the range of 12 to 18. Earlier this year (January 2008) the markets were well above the range (around 25) and right now, clearly far below it. What this means is, during the upswing, there would have been a fair number of companies with overvalued stock prices, but this also means that those very same stocks are now trading at undervalued prices. In other words, this is a good opportunity to buy these stocks. 

Don't know what PE is? Check out UTVi School

Pick stocks with discretion: According to a Dow theory (about buying in a bear market), you should look at a stock which had the biggest fall, because a stock that falls sharply in a bear market is also the one that increases rapidly in a bull market.

 

While you shouldn’t follow this theory to the T, it wouldn’t hurt to look at stocks that have declined much more than the rest. Of course, this cannot be the only criterion. There are certain other factors to be considered as well.

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You can analyse sectors and compare their performance in the stock market over the last couple of years. Here, you also need to take into account the growth potential. Also, sectors which are inherent to our day to day lives are those which will continue growing despite adverse market conditions – therefore FMCGs, pharmaceuticals, petrochemicals, etc are sectors that might see a fall in prices, but these will grow when the market stabilises. Similarly, with companies, you need to look at past performances, balance sheets, as these give you an indication of the stock's potential to rise. Another factor to look at is the management of the company. This will also determine how quickly the company increases its stock price.

One thing to be noted is that India's blue chip companies are strong, so buying these stocks at low levels and holding them for a long period of time is a pretty safe option. The Sensex is driven to a large extent by sentiments as well. So, if you're a short term investor, it's best to cut your losses while you can, because this stock market roller coaster will take a while riding to the top.