Tuesday, June 17, 2008

Market crash: What to do?

Market crash: What to do?


An imperfect but psychologically important measure of the Indian stock market - the ubiquitous BSE-Sensex - fell by 4% today, the hardest hit amongst Asian markets. This mirrored a 3% decline recorded by the US stock indices last Friday following a sharp spike in crude prices following fears of geo-political tensions in the Middle East as also due to an increase in the US unemployment rate.


Things look bad out there...
Things are not really fine with the global economy currently as rising oil and other commodity prices are sparking fears of a general economic slowdown across regions and countries. As for the Indian economy, before the recent oil price hike could be factored, the inflation level has already touched its high in four years.

As reported late on Friday last week, India's inflation (as measured by the wholesale price index) jumped to 8.24%, the fastest rise since August 2004. This adds further pressure on the central bank - the RBI - to hike interest rates, especially with economists expecting inflation to rise to a 13-year high of 9.5% over the next few months. That will be a severe blow for Indian banks' credit growth prospects with the same already slowing down on the back of high interest rates and a general slowdown in economic activity.


Higher raw material prices (oil and metals) are also likely to have a medium term impact on corporate India's profitability, with direct effect expected to be seen in sectors like automobiles, capital goods, cement, power and consumer durables. That's all part of the broader slowdown that the economy might enter into.

...so what?
Warren Buffett, the legendary investor, in his company Berkshire Hathaway's recently held annual general meeting, asked investors to 'think small'. Buffett made a simple point to investors - "As an investor, you don't need to predict the economic cycle (or even pay much attention to it). Instead, you should focus on evaluating individual businesses if you pick your own stocks."


When asked as to what were his views on the US economy, he indicated of having no clue and said that he did not care about it either. He said, "I haven't the faintest idea. We never talk about it. It never comes up in our board meetings or other discussions. We're not in that business [of economic forecasting]. We don't know how to be in that business. If we knew where the economy was going, we'd do nothing but play the S&P futures market." Such has been the humility of this man who has indeed been one of the greatest investors the world has ever seen.

Simply, do as the gurus do
So, Warren Buffett is not concerned about the macro-economy. Peter Lynch isn't as well (as the legendary fund manager spends very little time focusing on macro-economic issues). So why should you? Be like the gurus, and hold on to your horses (stocks for the long run). If you expect yourself to be a net buyer of stocks over the next 15-20 years, be happy on seeing falling prices.

· Rather than worry about today's crude price data and inflation or GDP growth estimates for the next quarter or year, you should be focused on owning companies that are best placed to create wealth for you over a period of several years, not days or months. However, the key is to stay strictly with those that are high-quality business models and have the capabilities to stand up straight through good times and bad.


Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice.

This mail is intended purely for the purpose of information sharing and general reading and is shared with the recipient without the intention to gain any commercial benefits. This communication is not intended as a buying or selling recommendation, the reader is requested to use his/her own judgement while taking any such decision.

Warm Regards

Aditya NADIG :)


posted by: Adi