We're in 'August' company. Hold on! - Views on News from Equitymaster

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We're in 'August' company. Hold on!

Jan 22, 2008

The Indian benchmark index - BSE Sensex - has touched its August 2007 levels yet again - this time following a rout that has eroded almost 25% of its value from the highs it had made just 12 days back. These 12 days have probably been one of the most manic Indian stock markets have ever seen. First there was irrationality surrounding the country's largest ever IPO, which actually entirely sold off in the very first minute of its opening. And then there is a situation of fear that has gripped participants over the past 7 days, who seem to be assuming their ‘world is indeed coming to an end’!

The Indian stock markets are reverberating with many panic cries like these! So are the markets across Asia and beyond - all on the back of concerns that the US economy is going into a recession. But things are not really certain now. Actually, they never were as we had been indicating to our readers in the recent past. But the intensity and the velocity with which the turmoil have happened, was not really predicted.

And, as it happens in all uncertain times, investors are pulling off from equities, which really have been riskier than anytime in the past few years.

Fears of the US subprime led recession spreading across world economies is what has led to this latest round of sell-off. The events that have unfolded over the past few days seem to have shaken investors' belief whether the stock markets, after a 4-year dream run, are actually a pretty 'risky' place. Well, they definitely are!

What’s our view?
In such a scenario, one should expect the sentiment to become very pessimistic. One should also expect the markets to be volatile. And therefore, short-term traders generally need to be on their toes. We reiterate that our broader view on equities remains that of high-risk. However, we continue to believe that long terms investors can find some very good opportunities when others (speculators/punters) are losing their heads in the panic.

  • Ajit Dayal’s view on stock markets

    Reiterating the fact, one is required to continue to invest by understanding the businesses of companies, quality of managements, and with a strict regard to valuations. Leave speculation to speculators! If the job is done correctly when a common stock is purchased, the time to sell it is - never! Not even in panic situations like the one we are witnessing today (or what was seen yesterday).

    While it might not be a one-way ride for stocks going forward (it never is), what is more important to note is that equities will provide attractive inflation adjusted returns in the long term. You just have to be rational in your choices and not follow the herd, and you need to value stocks not beyond any accurate or rational reflection of their actual worth. This is not to say that your equity investments cannot legitimately enjoy a huge leap in value, but this leap should be justified by the prospects of the underlying companies, and not just by a mass of investors following each other, as we had recently witnessed in case of power sector stocks.

    The unreasonable belief in the possibility of getting 'rich' quickly is the primary reason people burn their fingers in market crashes. One tends to neglect the fact that there is a direct correlation between high risk and high returns. While the history of market crashes does not in any way foretell anything calamitous for the future, the best thing that you, as an investor, can do is to keep yourself educated, well informed and well practiced in doing your homework.

    What to expect?
    Click here to read our latest view on the last fifteen Stock Select and Midcap Select recommendations.

    The writing on the wall is clear - Do not panic! Hold on to your horses!

    We remain positive on the India growth story from a 3 to 5 years' perspective. Earning a compounded annual return of 15% to 20% from a well-balanced equity portfolio should not be a difficult task during this period. However, asking for more than that, say 30%, 40% or 50% (as some mutual fund sales team have been found promising gullible investors) will be like asking for the moon.

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