The turn of the millennium changed the mindset of investors. We had an old set of investors who were happy with their winning the lotteries in the form of share allotments in regulated low priced public issues. Then there came the new breed. Stocks doubling in anything from one week to six months became fashionable to gun for. Stories of success always spread like wildfire and no one wants to talk about failures and losses. Public lore made our stock markets as a sure route to untold wealth.

Alas, the first round was too brief and savage. The year 2001 came like a butcher, killing all including the bystanders. Many people swore off equities as the borrowed money invested in the stock markets became a huge burden. A healing process and by 2007, things were back in full swing. Everyone had reliable information on so many stocks. Mutual funds raked in money through the IPOs. Yes, long-term was okay, so long as it was not too much more than a year. Then 2009 came and destroyed everything. New entrants were trampled upon. Most exited in panic. Those who stayed through the massacre of 2009 and put in new moneys reaped big rewards.

Alas, the picnic ended too soon. The fall was brutal and the rise caught most unawares. Those waiting to time the markets could not get in as the election results of 2009 shut out new money from the gains. Now, introspection and fear dominate the investors. We see that even if one had stayed for five years in a SIP in the broad market, the returns are like savings bank deposits, at best. Then if one looks at a ten year record, things begin to make sense.

In the last two years, our markets have witnessed a divergence that is not usual. Stocks of companies in sectors like FMCG and pharma have witnessed huge run-ups. It looks like there is a flight to quality. This makes me confident that we are not in a bear market. Investors seem to prefer less risk in their stock picks.

Stocks of the momentum era (real estate, infrastructure, metals etc) have fallen badly, some by as much as 90 per cent. I suspect the market capitalisation is half of what it was at its peak. Money is still around in plenty. That itself keeps the bear away. In spite of the innumerable troubles surrounding the world, every stock market is doing okay.

No bargain in value terms in any markets is a rule. None of the markets are in single-digit P/E multiples. The most worrying thing seems to be the lack of faith that we have in our companies. Corporate results have been fairly all right in this gloomy year of low economic growth. Yet the Indian retail investor is leaving equities to seek peace in bonds, bank deposits and gold.

Our equity markets are totally dependent on FII money flows. If they pump in money, the markets go up. If they don’t do anything, our markets remain flat. If they sell, the bottom falls out. There is no counterbalance to the foreign investor. The FIIs are a mix of long-term and short-term players.

Most of the FIIs stay invested for long in markets like ours, where the growth rates are the attractions. Government actions, inactions and scandals do dent their confidence, but they seem to be far braver than us. They realise that Indian corporate sector is doing well and will do so, in spite of government. Investors clearly are worried about government owned companies, which do not seem to have the profit motive that drives stock prices. The money, which chases these stocks, put their faith in the government of India seeing sense in letting go of the management at some time.

Maybe the expectations do get tempered from time to time, but everyone knows that given the poor financial health of the sovereign, it is a matter of time before corporations are driven by free market forces. Failure to do so is like pushing a self destruct button. The goings-on in the market makes it clear that equities are for the long term. Equity investment has to come from money that you do not worry about. You cannot put money in equities today, hoping to use it for a specific need in the next few years. It should be used more for estate or wealth creation. The individual has to start with fixed income for most defined needs and then use equities out of the balance money.

Timing of entry can be decided, but there is no control over markets when we want our money. Yes, we may get a panic situation like in 2009 or so when the index cracked to below 10,000. Today, if it cracks to around 12,000 it may be a great time. For these kind of opportunities, it is important to preserve liquidity. Equities are for investment and not savings. If we can understand the distinction, we will not cry about markets. Fixed income can only give us so much money. Keep investing in equities if you want to create wealth.

(The author is an independent investment adviser)