The financial and economic crisis of 2008, which still continues in some form or the other, has several lessons for investors.
One less that stands out tall is – it is always important for you as an investor to hope for the best but remain prepared for the worst. Those who easily fall into the trap of 'this time it’s different’, usually end up paying a heavy price for their follies. These investors are content and happy with rising stock prices, expecting them to continue to rise till eternity.
We have seen how bull markets in the past bring with them huge waves of hopes. Hopes that stock prices will continue to rise and rise, and never fall again! People also start hoping that one can become extremely rich trading in stocks – buying and selling, buying and selling, continuously!
The scariest part is that this huge wave of hope is not restricted to a few investors. Rather, it takes the form of a rate race where every investor is sure about making bigger returns than his friend, or relative or colleague! All this takes stock prices sky high, and thus the race becomes self fulfilling.
Just then, things that have never happened before (as per the memory!), occur. Markets crash! Stocks bought at astronomical prices are sold at these levels. Investors thus end up with deep cuts in their portfolios. Then they begin to think again – “This time it is different…the bear market will never end!”
Anyways, coming to the present times, Indian stocks do not look cheap by any standards of valuation. Even some leading global investors like Marc Faber and Jim Rogers believe that
Indian stocks can fall in value going forward. Faber had in fact predicted a 30% decline in Indian stock prices some time back. And very recently, Jim Rogers said that he does not find Indian markets cheap anymore. Even when we run through our universe of stocks under coverage, it gets difficult to identify compelling long -term stories.
Overall, we believe investors need to be very careful while investing in stocks currently. Well, if you are able to identify good companies trading at reasonable valuations, you can still invest in them from a long term perspective. Any compromise on quality (of companies) or investment horizon can lead you to despair.