So, are you buying stocks now?

In this issue:
»  The much-loved and over-cheered Sensex
»  Crash of 2000-01 was severe...
»  ...but it seems more frightening today
»  What is investing all about?
»  and more!!

00:00

So, are you buying stocks now?

Considering the shivers that the markets are giving to investors (and speculators alike) day after day, the answer to this question for many might be a resounding 'NO'.

And why not?

Consider this...the much-loved and over-cheered (till about six months back) BSE-Sensex is down almost 41% since hitting its peak in January 2008. Today, it just fell below its 52-week low!

The BSE-Midcap and BSE-Smallcap indices have dropped even more - 54% and 61% respectively - from their all time highs.

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This kind of movement in share price can make anyone nervous, even the seasoned investors. With stock across the board declining by anywhere between 30% and 60% to even 90%, the mood seems very somber.

This is in fact the scariest stock market we've seen in many years. While the last big crash - the dot-com bust - was more severe, today's market seems far more frightening.

...and that means it is a wonderful opportunity to make a lot of money...of course, by investing for the long term.

The crash of 2000-01 was severe...
The dot-com bubble burst in February of 2000. And the pain continued till the end of September 2001. During this nineteen-month period, the Sensex lost 56% of its value...not to mention that a whole host of dot-com stocks evaporated investors' money.

However for this crash of 2000, investors had no one but themselves to blame. They paid astonishingly high prices for companies (existent and non-existent but listed!!) that did not have any earnings history. In many cases, while companies had earnings history what was lacking was a sensible business plan. But the stocks still ran up...spectacularly.

And what followed later was even more spectacular...a deep correction.

...but it seems more frightening today
The fact that the current problem doesn't seem to be going away anytime soon makes today's situation even more frightening than the dot-com crash. The current problem is not of a single sector, it is of the entire economy - global and local.

The current problem is a creation of years of monetary and financial mismanagement. And it will take some while for the issues to be resolved.

There simply seems to be no end in sight and no safe place to hide. And that is exactly why we believe that you should be buying stocks.

We are not sure which way the markets will move in the short run. In fact, given that the issues will still take time to resolve, do not be surprised if stocks continue to slide from their current levels.

However, we believe that shares of companies with solid businesses and visionary managements at helm have been punished as bad as shares of companies with doubtful credentials. The former bunch is trading at discounted prices because of the Mr. Market's pessimistic mood.

As such, if you decide to buy these quality stocks today, we believe you will be more than pleased in a few years.

Ultimately, what is investing all about?
Investing in general, or for that matter investing in stocks in particular is not based on...

It is based on a need - need to create pool of funds for...

• gifting your wife her first world tour on your 25th anniversary,
• education and marriage of your children,
• your post retirement life,
• any other financial 'commitment'.

Till the time we have these needs awaiting our actions, investing will survive...

...and so will investing in stocks.

And given how many times stock markets have gotten through the toughest troubles, there are reasons to believe that stocks will rise again.

We remember the famous words of the famous author and educator Charles R. Swindoll - "We are all faced with a series of great opportunities brilliantly disguised as impossible situations."

So, if you have an investible surplus that you will not need for the next 5 to 10 years, here's your opportunity.

Investing in stocks isn't dead...common sense tells that
Here is what Warren Buffett had to ask investors in his 1997 letters to shareholders -

"If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?"

These questions, of course, answer themselves.

But now for the final exam: "If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?"

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the 'hamburgers' they will soon be buying. This reaction makes no sense.

Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

And the prices are sinking...as of now.

So, are you buying stocks now?

04:45

Today's investing mantra

"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch

PS - Equitymaster subscribers, we will be putting up a review of our recommendations of the last six months on Oct. 1, 2008. This will be for all our recommendation services - Stock Select, Midcap Select and Hidden Treasure.