• SEPTEMBER 16, 2008

Are you nervous yet?

The crisis (of confidence) that the global financial system is currently facing is in fact one of the worst in living memories. Some say it is bigger than the crash of 1987, or the dot-com bust of 2000 though still lesser than the Great Depression of 1929. After all, the investment banks that survived these crises are failing now. First it was Bear Stearns, and now Merrill Lynch and Lehman Brothers.

The good thing is that the world is now left with only 2 big US investment banks of note (Goldman Sachs and Morgan Stanley), a breed that is highly responsible for this crisis in the first place. The other three - Bear Stearns, Lehman and Merrill Lynch are (almost) extinct.

That's the beauty of capitalism - survival of the fittest and extinction of the failed. There is a good amount of cleansing that is taking place in the financial markets. And it is good for the global financial system at large.

We are not new to financial crises
Remember that the world has been through many financial crises over the years. It will get through this one as well. We know that the dust will settle eventually. What we do not know is - when. But it will. It always has. The world, or for that matter, stockmarkets have not seen their death with the end of these few financial giants.

This is an oft repeated quote from Warren Buffett, but it is so true to this situation - "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

This is true for investors globally. And this is true for investors in India as well - the long term types.

As Ajit Dayal, co-founder of Equitymaster, recently mentioned in one of his 'Honest Truth' newsletters, "The Indian markets are spooked by all these events and we wait like slaves for global cues. The short term capital was the terrible bridge that India built. We are paying the price for it. India's economy is not coupled to the US or the developed world but the Indian stock market are very much coupled. We are stuck in their insanity. Stay calm. Stay sane. Keep on investing, methodically, carefully."

  • Also read - The Honest Truth

    In simple terms, you need to love pessimism to succeed in investing in the long run. Stay calm! Do not panic. And if you're still going to panic, panic constructively.

    We shall continue to update our subscribers with any change in our view on stocks that we have recommended in the past. In the meanwhile, we believe that the overall pessimism towards stocks over the past few months has knocked some great Indian companies down to attractive prices.

    The ability to ignore short-term market sentiment and keeping focus on a company's underlying fundamentals is what separates investors from speculators. It is also what propels long-term market-beating returns and wealth creation.

    So do not try to predict where the market is headed next (the experts at those investment banks failed to do so!), as doing the same is nearly impossible as also immaterial to your long term investment returns. Rather, utilise your time in looking out for quality companies whose stocks are trading at discount to their intrinsic value. That is exactly what we are doing.

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