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Fortune favours the brave... - Views on News from Equitymaster
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  • Mar 12, 2001

    Fortune favours the brave...

    The facts....
    NASDAQ crashes to a 27 month low and is hovering just over 2000 levels like a boat with a Captain on the deck of a sinking ship. Last year this time it was 5048! Cisco says it's going to cut staff by 16%. Intel lays off 5000 people and cuts quarter earnings by 25% with gross margin expected to decline by 8%, Yahoo! Suddenly says that its 38c per share earnings won’t materialise and they will now only breakeven. Translated that means 38c just became zero. General Motors decides to idle two production plants. The US economy is slowing down – tech stocks are the worst affected. The US Federal Reserve has cut interest rates and the administration has lowered tax rates. Sentiment is weak. China goes from strength to strength while the Japanese economy is on verge of a collapse.

    Domestically we have our own unique set of problems. A payment crisis on the bourses. A Stock Exchange President resigns. TMT has blown up like TNT in everybody’s face. When the markets went up nobody cared, now its run for cover. The regulator keeps assuring everyone that everything is safe. We have a finance minister who is upset and rightly so. He delivers an ‘A’ grade budget. Industry and most economic sections gave him a score from 8 all the way to 10 on 10. He gives the stock market everything it could ask for. Corporate tax surcharge is removed. Dividend tax is lowered. Capital gains invested in IPO’s are tax-free. Software sector remains untouched – no tax, not even a service tax. Petrol doesn’t cost more, and the latest inflation number is down.

    Against this backdrop the hapless investor remains a mute and helpless spectator. Investors were always on the sideline. 85% of household savings went into fixed income products. A paltry 3.5% went into equity. It was hoped that with the impetus given by the budget this would channelise savings into equities. Lowering of savings rates across the board would also maybe help that shift. After all a vibrant capital market is the engine for economic growth. IPO’s might receive some more funds flow. Sentiment will remain buoyant. Unfortunately, the investor has been bashed around yet again. The greater problem about the whole crisis is one of timing. Sentiment and confidence has been crushed – the extent too great to tabulate. Market cap is the closest number that can reflect this sentiment and the evaporation of wealth has been truly alarming.

    There is a call attention motion in parliament on Tuesday in the Rajya Sabha. Hopefully the issue will not get politicised and leveraged by the opposition as it will only lead to political compulsions and colorations distorting whatever probe is to take place. This week is crucial. We will then know whether the Pay In has taken place smoothly on the two major Bombay bourses. If not, then fasten your seat belt and get ready for the ride of your life. Just when you thought you had enough!

    The Call...
    For an investment strategy you have two choices. Fortune favours the brave. Discretion is better than valour. When fear and panic are at their peak then discretion becomes the driving factor behind investor sentiment and valuations. That doesn’t change fundamentals. It just takes longer for stock prices to reflect their true value. Go in for the former choice.

    If you’d rather not get mauled by the bulls and the bears and don’t want even a drop of additional blood in your portfolio then go defensive. Go in for the latter choice.

    Nick Leeson has served his sentence and so has Mike Milken. In India we will continue waiting.



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