Saturday, October 11, 2008

STOCK MARKET: BITTER BUTTER OR SWEET SANDESH?

Some things never change. This is not the first time the stock market has given investors the shock of their lives; nor will it be the last. But, like always, lessons crying to be learnt remain unlearnt by most looking to either beat inflation or achieve financial freedom through the stock market.

Wasn't it only a few months back that every one was gung ho about the scorching India story? Weren't many seasoned analysts then predicting that the sensex would soon touch 40,000 and that the real bull run had yet to come? Wasn't the government too patting itself on the back for its terrific performance that was being reflected in rising share prices? Weren't many of us excited at becoming richer than we thought was possible in double quick time? Wasn't every housewife proudly proclaiming that she had cracked the 'Da Vinci Code' of the stock market and had perfected the art of picking real winners among stocks?

Suddenly, without any early warning, a financial Tsunami has hit every one and devastated many. That growing and seemingly solid block of financial success that investors were looking at excitedly almost every day has just melted away like very bitter butter in their mouths. A few have already killed themselves along with their families; some are seeking psychological counseling; many are not willing to admit that they have been hit like never before; others are comforting themselves with the thought that over the long term, the stock market is not only safe but gives superior returns.

Fundamentalists and technical analysts are no longer able to make any real sense of the correlation between their detailed financial and price-movement analysis and share prices to make believable predictions about what will happen in the next six months. So wrong have almost all of them been during the last six months. Mutual fund managers, those magicians and financial whizz kids earning obscene amounts to play around with your and my money to make it grow like we never thought was possible, have also got it all wrong, at our expense!

When shares in India were going up as if there was no tomorrow or gravity, most experts were saying that this time the bull run was 'different' and that those who were not in the stock market were losing out big time. This was the refrain when the Sensex had crossed 20,000! The trap was then set for gullible investors to rush in and pick up stocks at outrageous PE ratios. And rush many did, thinking that the nightmare of the days of Harshad Mehta and Ketan Parikh would not visit the markets again.

But the terrible nightmare has returned, thanks to events unfolding in the US. To cap it, the Indian economy, which was galloping at around nine percent has also simultaneously slowed down appreciably to the seven plus range. India's industrial growth during August 2008 has plummeted to 1.3 percent compared to 10.9 percent during the same period last year, adding more misery to the already bleak and now seemingly hopeless outlook for the stock markets. No one can now say with any reasoned confidence as to when the market will bottom out and how long it will take for it to recover. There is nothing but gloom and pessimism out there.

The present crisis may have been triggered by the blowout in the prices of oil or the sub prime crises in the US. It may have gone into a tail spin due to the collapse of the some of the biggest global names in financial business like Lehman Brothers, AIG and Merrill Lynch. It may also be due to the recession in the US which was being denied till only a few days back. It may even have been aggravated by serious structural and regulatory weakness in global financial markets, which have suddenly got uncovered.

All that is of little relevance or comfort to millions of ordinary investors whose faith has been rudely rattled. The reasons for the collapse may be different this time than they were the last time or any other time earlier. That is really not what ordinary investors need to understand so that they don't 'burn their fingers' in stocks repeatedly.

The one thing that they need to remember at all times is that bad news will always strike without warning and that markets will tank before they can get out. So, ordinary folks like us who don't have money to gamble away without feeling the pinch, should only get into stocks for the long haul, somewhat like Warren Buffet does. And that automatically means that they should only put in that much of money in the market that they will not need to meet their known requirements in the short run.

Those few who have followed this elementary strategy may be distressed at seeing their investments shrink alarmingly. But, if they sit tight and weather the storm out, they will be rewarded very handsomely. The one thing that you need to avoid like the plague now is to either panic and sell or 'churn' your portfolio on the advice of analysts who will tell you how stocks that you don't hold are exactly the ones you should, if you want to get out of this hole fast.

Buy cheap, sell dear. This is the fundamental guiding mantra for investors who want great returns from shares. Right now, all stocks are going cheap, some very cheap. But it will be a brave investor who will want to go out and buy now, only to find that he has lost 20 percent the next day. That is the problem. Stocks are cheap only when there is pessimism and despondency, making it difficult for most ordinary investors to make a 'buy' call. No one knows when the market will hit the bottom. And in the process of trying to determine that before buying anything, most will find themselves entering the market only after prices of good shares have gone up in multiples of their present levels! Similarly, it is equally difficult to perfect 'coitus interruptous' when stocks are peaking, as most of us must have learnt in the last few months.

If you have money to spare for a couple of years, now is the time to start buying, provided you have the heart and patience to sit through further dips while being poised to benefit from any positive surprises that the market might spring, again without warning and at great speed. At times like these, the stocks you own might just be the best stocks to buy, unless you have tinsel that looks like silver no more. No matter what, do not borrow money or put all that you have into the market to make that quick buck that actually is waiting to be made.

Like always, markets will bloom after this gloom and the melting bitter butter will start tasting like sweet Bengali sandesh. When you are blissfully enjoying that great taste, do not forget to remember that the whole cycle will repeat itself, again and yet again. And again you will not know when.