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Markets: You are not alone!

Mar 5, 2007

"It's only when the tide goes out that you learn who's been swimming naked." - Warren Buffett Did your stocks survive last two week's plunge? No? Well, you were not alone to have taken the hit! Data compiled for NSE-Nifty stocks show that, during the period from 2nd February 2007 to 2nd March 2007 (28 days), all 50 of them lost ground, with the Nifty itself losing 11% during this period. What more, 23 of these (or 46% of the pack) are down on a yearly basis as well! As for the BSE-Sensex, all 30 stocks ended the 28-day period in the red.

Nifty: Top 10 losers
02-Feb-07 02-Mar-07 Change 52-Week H/L
VSNL 505 360 -28.8% 516 / 300
Grasim 2,811 2,097 -25.4% 2,940 / 1,455
Hindalco 184 138 -25.2% 251 / 133
Jet Airways 786 600 -23.6% 1,058 / 475
Guj. Ambuja 143 110 -23.1% 153 / 70
OBC 219 174 -20.5% 280 / 139
MTNL 169 135 -20.1% 229 / 123
ACC 1,041 854 -17.9% 1,195 / 601
PNB 517 427 -17.4% 582 / 300
BHEL 2,502 2,098 -16.1% 2,666 / 1,533

The weakness in Indian equities over the past few sessions has been due to a combination of factors - most of them actually impacting the whole of global equity markets. China was simply the trigger, but the fears of slowdown in the US has an equal part to play if not more. And you know what, despite being the 'trigger' for the global 'collapse', China was the only one among the major global indices to end the stated period (2nd February 2007 to 2nd March 2007) in the positive!

Global equities: India 'leads' the pack!
Index Country 02-Feb-07 02-Mar-07 Change
BSE-Sensex India 14,404 12,886 -10.5%
Bovespa Brazil 44,998 42,370 -5.8%
Hang Seng Hong Kong 20,564 19,442 -5.5%
CAC France 5,677 5,425 -4.4%
Straits Times Singapore 3,218 3,079 -4.3%
Dow Jones US 12,653 12,114 -4.3%
DAX Germany 6,886 6,603 -4.1%
NASDAQ US-Tech 1,798 1,726 -4.0%
FTSE UK 6,311 6,116 -3.1%
Nikkei Japan 17,547 17,218 -1.9%
Shanghai Comp. China 2,673 2,832 5.9%
Source: Yahoo Finance

After the significant volatility witnessed in equities over the last two weeks, you must be wondering whether this is a sign of things to come. And why not! Following four strong years of stock market gains and sky rocketing valuations across sectors, it would not be out of doubt to believe that the markets may enter a prolonged period of selling (or correction). Whatever the case may be, recent events are certainly a reminder that there is, in fact, 'risk' in equity investing.

"Risk comes from not knowing what you're doing." - Warren Buffett

So, what are the lessons learned?
The past few weeks must have provided you with a great time to reassess your risk exposure. However, it would be folly to blindly sell off your stocks based solely on the recent events. While the latest market plunge might serve you a wake-up call, it should not be seen as a forecast that 'all' stocks are headed downward. In fact, now is a great time to make sure that you are invested in financially sound companies with strong business models and reasonable valuations.

Where to from here?
As we had mentioned in our view on the market after the Wednesday (February 28, 2007) fall, the recent decline should be taken as an opportunity to invest and build a long-term equity portfolio. Needless to say that the equity component of the overall asset allocation should be in line with one's risk-return profile. Overall, you, as a retail investor, should not shy away from equities given the recent decline in the stock market. Invest in good companies with strong business models (i.e., ability to ride through cycles) from a three to five year perspective and do not worry about the day-to-day market movements.

Parting note (From Warren Buffett's Letter to Shareholders, 2000)
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."

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