Are you heading for the exit? - Views on News from Equitymaster

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Are you heading for the exit?

Sep 18, 2008

..or so it seems seeing the way US, European and Asian markets are behaving these days. Take for example the US markets' yesterday's behaviour when the benchmark indices were down almost 4%. Or for that matter the way Asian markets have opened today, where losses range from 3% to 7%! Our own BSE-Sensex is almost 5% down. Reuters writes - "The seismic shift on Wall Street this week continued to create a sense of global panic, with frenetic consolidation in the financial sector in the world's largest economy, sending the MSCI all-country world stocks index to its lowest since November 2005."

There's panic everywhere!

And the panic seems for real. For it is based on things that are real...and stupid!

Stupidity and rashness from investment bankers, subprime borrowers, and central bankers is what is the root cause of the current crisis...and panic.

These people have made so many mistakes, that we can understand why investors would panic.

In several ways, the current distress seems worse than so many crises that the global financial system has seen in the past - like the 1987 crash in US stockmarkets and the 2000 dot-com bust.

These investment banks, who survived the earlier crises, must know the difference. What is more distressing is the fact that there is very little hope that the situation can turn for the better anytime soon.

  • Also read - Simple survival lessons

    So, are you heading for the exit?
    So, the best course of action for you, the long term investor, is to head for the exits. Right? Wrong!

    The current turmoil in the markets is a cautionary admonition for the culprits (like investment banks and hedge funds) and speculators to stay out of irrational behaviour.

    The unreasonable belief in the possibility of getting rich quick 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 dire for the future, the best thing that you as an investor can do is keep yourself educated, well informed and well practiced in making your moves.

    Your stocks can legitimately enjoy a huge leap in value over the long term, but expectations of this leap should be justified by the prospects of the underlying companies, and not just by a mass of investors following each other.

    Meanwhile, the panic continues...

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