BUBBLE BRUST- How to save yourself

If you were not an investor during the dotcom bubble, your parents can tell you about the losses that the IT funds brought to them after 2001. Unlike Buffett we are not averse to investing in IT stocks or funds. But the problem with investing in sector specific stocks or funds is timing the market. Unless you have a really good understanding of the sectors' fundamental prospects, the chances of going terribly wrong are ridiculously high. Further media reports often tend to mislead investors about the near term opportunities or pitfalls in the sector. No newspaper warned investors about the impossibility of IT heavyweights retaining their astronomical P/E ratios during the dotcom bubble. Similarly real estate funds were touted as the next big money making opportunity until 2007. But investors have learnt little from these past mistakes.

Infrastructure related stocks and funds became investors' delight after the Planning Commission charted out mega outlays for the 11th plan period (2007-2012). The US$ 500 bn of investments planned for this period in sectors ranging from power to roadways to cold storages painted a rosy picture for prospective investors. However, as the plan period heads closer to conclusion; the targets are far from being met. Policy inaction, problems in land acquisition, funding constraints are amongst the many hurdles that have brought India's infrastructure dreams to a standstill. In the bargain, the investment returns in the sector have dwindled. The Planning Commission has yet again been ambitious enough in targeting GDP growth of 9% and investment outlay of US$ 1 trillion for the 2012-17 plan period. However there are no takers for these targets this time. In fact the infrastructure dedicated funds from the stable of the top mutual funds in India have lost between Rs 4 bn to Rs 9.5 bn by way of redemptions in the last 12 months. Not to mention that some infrastructure related stocks are trading close to 52 week lows. What does this trend indicate? That investors tend to buy sector specific themes at high valuations and sell them when valuations are at historical lows. Isn't this just the opposite of what an astute value investor should do?

We suggest that whether it is stocks or mutual funds investors would be better off staying away from sectoral themes. Most if these over hyped themes bring little value to the table for investors. More importantly investors tend to overlook long term fundamental strengths and weaknesses in the sector thanks to the herd mentality. The bottom up approach to picking stocks with sound fundamentals and cheap valuations is the safest bet to avoid such blunders.

source: equitymaster