|»5 Minute Wrap Up by Equitymaster|
On This Day - 17 DECEMBER 2011
Why bad news is good news for investors?
In this issue:
In recent times, the news media has been awash with pieces and reports on the diminishing sheen of the India growth story. All the undesirable things that could have happened- high inflation, severe rupee depreciation, slowing growth and widening fiscal gap- are staring right in our face. Moreover, a slew of corruption scandals and the political deadlock only add salt to the pain.
Are you still bullish on the 'India growth story'? Or do you think India has lost its steam and that the days of 9-10% growth are mere history? Well, we sincerely suggest you do not rush to conclusions about India so soon. Do you remember some years back how everything seemed hunk-dory about an India whose time had come to emerge as an economic powerhouse? Do you also remember the times when India emerged resilient from one of the most disastrous financial crisis that struck the globe in 2008? So what has happened now? What has gone so awfully wrong with India in 2011?
We believe what went wrong was the way we were looking at India. Psychology has a term called 'anchoring bias' to explain that. 'Anchoring' means to rely too heavily on one trait or piece of information while making decisions. In other words, we develop narrow-minded views based on some pieces of information without considering the larger picture. On the basis of what we see flashing in the news media, there are times when we are extremely bullish on India and there are times we think it is all over. In this process, we fail to weigh and keep a balance between the good and the bad elements in the economy. And stock markets, which discount the future based on the current news flow, almost always tend to go to extremes.
Going back to our headline, can you now understand why bad news can actually be good news for investors? To give you a gist, a continuous flow of bad news translates into extreme pessimism towards stocks. In other words, this is the best time to go bargain hunting. There is a famous saying: "Either you will get good and cheap equity prices or you get good news." Another very famous quote from legendary investor Warren Buffett goes thus: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." So look around and if you start sensing that people are getting too fearful, it is time you get greedy.
The Indian stock markets witnessed selling pressure during the week with the BSE-Sensex down by 4.5%. Further depreciation of rupee as against the US dollar was the main concern of investors. This along with slowing economy, increasing fiscal deficit, prevailing high interest rates and substantial pulling out of funds by the foreign institutional investors led to the markets reaching their 25 month lows.
Amongst the other world markets, European markets suffered the most with France (down by 6.3%) and Germany (down by 4.8%) being the top losers. Singapore, Japan and Hong Kong were able to contain their losses within 2%.
Click here to read our series on 'Lessons from Charlie Munger'
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