Wednesday, 19 March, 2008

Greed & Fear

Greed & Fear

Guess that my blog will be a reflection of my thoughts - but likely to be relatively irregular. All of us must have heard lots of news about the huge downward trend in the share market in the last couple of months.

Let me add to the clutter with some of my own thoughts:

  1. The Sensex was quoting above 21000 levels not too long ago
  2. It is quoting around 15000 levels presently, just a couple of months later
  3. Some major shares have lost 40-70% of their value in terms of market-cap in the same period of time
  4. To the best of my knowledge, none of these companies have had a change in performance levels or likely performance levels significant enough to warrant such a drastic fall
  5. India is still likely to grow at a good enough pace (A growth rate of 7% is likely to be almost as significant and appreciable as a growth rate of 8%)
  6. If USA ... and other global economies ... avoid a recession and get back to normalcy, the boom times will be back again and markets ought to recover
  7. If USA ... and other global economies ... get caught in a recession, after the initial shock, money (from countries ranging from West Asian oil biggies to nations like US, European majors, etc.) will be forced to go in search of countries that are performing well - which again means nations like Brazil, India (though perhaps not Russia/China)

Considering the above, there are only two conclusions to be drawn:

  1. Many shares were (probably) grossly overpriced just a couple of months back (Reason - Greed of the vast majority of investors, day-traders, speculators, et al)
  2. An equally large number of companies are likely to be grossly underpriced at this point in time (Reason - Fear of the very same people)

Moral of the story, in a nutshell:

Try to develop the courage to be a really long term player (remember that old adage which says "Cash is King") and:

  1. Start buying high quality shares right now - Don't wait for the experts to tell you to buy. They are likely to do so only after they have bought all that they wanted to buy. Most important, do your own research before identifying which shares to buy. Just because a share has come down from Rs. 1000/= to Rs. 400/= does not make it a great buy - It may go down further to Rs. 25/=! Make sure that you are driven by genuine earnings, regular dividends, consistent growth, good earnings visibility, etc.
  2. Keep converting part of your paper profits into cash profits periodically by selling, especially when shares are grossly overpriced (clue: everyone is interested in buying shares, including the corner paan-wala and your grandmother who has never looked at anything other than NSC & PPF for tax-saving purposes!)

Happy investing!



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