Mar 12, 2008|
Fed's dole, Buffett & more...
With a view to boost liquidity in a crunched system, as also to perk up sentiment soured on fears of a looming economic recession, the US Federal Reserve, in coordination with central banks worldwide, has decided to lend upto US$ 200 bn to banks. And the global stocks indices have taken cues from the same. While the Dow Jones in the US recorded its best day in almost 5 years yesterday (raking in gains of almost 3.6%), most Asian markets are also trading amidst strength today. Markets in Hong Kong, Singapore and Japan are all up more than 2% currently. A large part of this US$ 200 bn outflow will take place from the Fed's balance sheet, which holds around US$ 713 bn of treasuries (or treasury bonds).
While the general consensus with regard to the health of the US economy is that it is in a precarious state, whether and to what extent will these temporary dosages cure the ailing economy is for us to see. The interesting thing now to watch out for is whether our own Dr. Reddy thinks alike his counterpart.
In a recent meeting with some business school students, Warren Buffett said, "Over the past 50-60 years, Charlie (Buffett's business partner) and I have never permanently lost more than 2% of our personal wealth on a position. We have suffered quotational losses, 50% movements. That's why you should never borrow money. We don't want to get into situations where anyone can pull the rug out from under our feet. In stocks, it's the only place where when things go on sale, people get unhappy. If I like a business, then it makes sense to buy more at 20 than at 30. If McDonalds reduces the price of hamburgers, I think it's great."
In this respect, we would like to drive home the point that one is required to continue to invest by understanding the businesses of companies, quality of managements and with strict regard to valuations. Leave speculation to speculators! Not even in volatile situations like the one we are witnessing these days. And to take cue from Buffett's analogy, there are so many good quality stocks that are on sale currently. You might lose 50% of your investment in such times even on good quality stocks. But if you believe that the job was done correctly when the stock was purchased, the time to sell it is - never!
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