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The pain of losing money

Dec 11, 2008

Over the past one year, we have witnessed stock prices fall like a pack of cards. Investors everywhere have deeply felt the euphoria of seeing the value of their stock portfolios swell to very pleasing numbers just around a year back. But what they have also felt, perhaps much more deeply, is seeing those numbers shrink faster than they could have ever imagined. The scars of that experience are going to be a big influencing factor on most investors' decision making for some time to come. Amongst many others, two things make investors' current attitude towards stocks very evident. Volumes have almost completely dried up on the stock exchanges, and IPOs are being treated like dirt. As they say, the pain of losing money is twice as much as the pleasure of making it.

But the crux of this article is just how much an experience of the past can influence decision making in the present. How much of that influence leads to wiser decision making is something that often goes unanalysed. At the valuations that many good companies are being given currently, investors are surely projecting out into the future what they have seen in the recent past. Warren Buffett likes to describe this by calling it investors' unshakable habit: looking into the rear-view mirror instead of through the windshield. What we observe looking backward, and what we are observing currently is making us very discouraged about the future. But the fact of the matter is that our excessive fixation on the past and the present is hindering the clarity with which we project the future. It is making sure that a certain amount of bias creeps into our vision of the future.

When times are good for long and many have made easy money, that's the bias that rules our projection of the future. And the same goes for now, when we have seen some very frightening events in the recent past. Investors are seeing the future as full of black clouds and impending thunder storms. Investors are projecting the credit crisis to continue. They are also projecting scarcity of capital and declining corporate profits to continue.

The fact that the current problem doesn't seem to be going away anytime soon makes today's situation even more frightening than the dot-com crash. The current problem is not of a single sector, it is of the entire economy - global and local. The current problem is a creation of years of monetary and financial mismanagement. And it will take some while for the issues to be resolved.

There simply seems to be no end in sight and no safe place to hide. And that is exactly why we believe that you should be buying stocks.

We are not sure which way the markets will move in the short run. In fact, given that the issues will still take time to resolve, do not be surprised if stocks continue to slide from their current levels. However, we believe that shares of companies with solid businesses and visionary managements at helm have been punished as bad as shares of companies with doubtful credentials. The former bunch is trading at discounted prices because of the Mr. Market's pessimistic mood.

As such, if you decide to buy these quality stocks today, we believe you will be more than pleased in a few years.


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