Patience Has Its Rewards

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The Sensex has delivered a mere return of 2.8 per cent in CY10 as compared to returns of 53 per cent in CY09. However, it is unfair to compare the returns since CY09 witnessed the bottom in March with the impending outcome of the closely fought general elections in May that led to many investors staying on the sidelines. On the other hand, CY10 has been witnessing a consolidation of gains as only select stocks have delivered meaningful returns. The market can regain momentum closer to Diwali as it warms up to FY12 earning estimates. CY10 has so far favoured the defensives such as pharmaceuticals, FMCG and OMC, along with automobiles and banking. Apart from banking, none of the other sectors pulls any significant weight with the Nifty.

Moreover, most of the stocks among the defensives look expensive on all the concerned parameters when compared to their historical averages. It would be prudent to bet on the index heavyweights such as RIL and other rank underperformers whose business prospects are improving, including Bharti Airtel, Reliance Infrastructure, and ICICI Bank for the remainder of the year. It is difficult to make a case for these stocks not to outperform as their current valuations are at a steep discount to the index while their earnings are likely to improve significantly by FY12. Also, defensives cannot lead the market forever - the law of the market will catch up sooner than later.

The onset of a normal monsoon season has been a huge relief for the market. Inflationary trends along with the central bank’s action and continuation of reform measures assume importance. The second quarter earnings would broadly indicate the growth trajectory for FY11. Global developments, especially in the US and Europe, will remain critical in determining the course of the market in the near term. On the whole, it is a good time to stay invested as equity is expected to deliver better returns than any other asset class over the next two years.

Equity investing demands time and patience from an investor. It is not the initial capital or timing but patience that eventually determines success. As the equity culture is new to India, it is still viewed by many as an instrument to make a lot of quick money or to acquire the highest returns. It is not unreasonable to expect higher returns, but it is more important to the investors to secure consistent returns for many years. It is the phenomenon of compounding that creates wealth over a period of time.

It may not appeal to many investors but it is sufficient to generate 20 per cent returns on your investment over a longer period of time (more than 20 years) to make you one of the best and wealthiest investors. To generate such returns over a period of time, it takes method and a process which needs to be understood and followed early on. Momentum investing provides momentary pleasure but it has never created wealth for anyone in history. On the other hand, impulsive investing has destroyed many a fortune at different times. So investors need to have patience and conviction in their investments.