Mar 22, 2011|
Does this phobia affect your investments?
Fear of the unknown. This is one phobia that all of us suffer from. Time and again, we come across situations in life that have no precedence. History repeats itself but not in the exact manner. Although we are well armed to deal with difficulties that are repetitive in nature, unforeseen situations leave us confounded. We panic and things become worse.
Stock markets are not very different from life in general. The companies that we invest in operate in the same environment in which we live. They face the same sort of challenges that we as individuals face in our daily lives. These companies also fear the unknown. This becomes more evident in the wake of natural calamities and other crises, be it the recent earthquake in Japan or the Middle East political crisis.
Although the impact of such events may turn out to be too big to handle, can we actually predict the economy? Certainly not, if we agree with what legendary investor Peter Lynch has to say about it.
As per Lynch, "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."
Some situations are beyond our control and our predictions. While we can say with certainty that the natural calamities are a result of global warming, we can never say which region will get hit by an earthquake and when; we can state that India is facing political instability but cannot predict which political ally will withdraw its support from the Government next.
Then what is it that we should do? Theoretically, it would make sense to maintain a diversified portfolio with investments in all regions, asset classes and sectors. But, practically it may not be possible to do so. We should see how things are panning out and then decide on the future course of action. Panicking will only make things worse.
Life revolves around the assumption that we will be able to face the difficulties that we encounter on our way. In the same manner, the going concern accounting principle also assumes that a company will continue functioning as a business entity. The least we can do is to ensure that the companies we invest into have the capability and the resources to deal with such events in the best way possible i.e., their risk management/disaster management practices are in place.
To conclude, the unknown has existed for time immemorial. It has happened earlier and will happen in the future too. We need not fear it but must surely equip ourselves to deal with it.
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