There seems to be no end to the current stock market crash.
Today, the Indian stock markets as represented by the BSE Sensex and the NSE Nifty-50 crashed by over 10%. Some stocks fell much harder...Unitech fell 50%! If you owned Unitech yesterday, you would be half as rich today on Unitech.
Current market conditions and the crash are truly unprecedented. A great change seems to be afoot. And in times of great change, there are obvious winners and losers. So far, the bears have been winning and the bulls have been losing big time.
Some battered bulls are now crying out for help. These are not the average investors but many are so called experts that you see so many times on business channels. Many such bulls have lost money and continue to lose money. It is obviously hurting. And hence these people are calling for help from all corners.
Some people cry for a ban on short selling.
Others want rate reductions and easier money.
Some want the government to do something, as if it were the job of the government to protect asset prices in some way.
Some want hte government to set up a market stabilisation fund to prop up the markets.
Some want a change in the way futures are settled on settlement day.
Some are angry that there is no level playing field between local investors and FIIs.
Some desperately seek any kind of silver lining in bad news.
People simply want the markets to go up again and for better times to return.
I was amused to see the remarks of one such celebrated fund manager and CIO of Reliance Mutual Fund, Madhu Kela. He seemed to have anguish in his voice complaining that mutual funds are not allowed to go short in any signficant manner while FIIs are allowed to do anything. He added that he would have loved to short the market as well given a choice. I found it quite amusing.
For one, a mutual fund is not a hedge fund. It is designed as a vehicle for the average investor to participate in the stock market. Short selling has a greater risk than long only buying and it requires greater skill. By not allowing short selling in any big way, the average investor is protected against incompetence of the fund manager, if any, to sell short.
Also, if someone finds stocks cheap, he/she should go ahead and buy. Reliance mutual fund is saying on the one hand that stocks are cheap and then stating on the other hand that they are waiting with a lot of money to buy when markets stop falling. By abstaining from buying, is Reliance Mutual fund not also contributing to the fall?
And assume if mutual funds were allowed to short sell as well? Would the markets have not gone down faster as mutual funds would have come around to shorting the markets instead of the buying that some have been doing?
And speaking generally, when the markets were going up, no one was complaining about anything. Everyone was happy when the markets went up 50% in 2-3 months in Sep-Nov 2007. Now that the markets are crashing, these experts are now crying for help and lamenting about how things are biased against them.
They are behaving like cry babies. Where is the personal accountability? Anyone who made a loss, made it because they chose to invest in the markets. They and they alone are responsible for their losses. Period! They lost money because they made a bad choice and were blind to extreme events occuring.
There is no point in cribbing and complaining. There is no point in whining. Yes, there might be genuine issues with the markets and all the problems that these experts talk about might be valid. But these have existed and are not something that have been thrust upon them overnight. They were aware of these issues when the markets were going up, and hence should not complain how these caused them losses.
Markets go up and markets go down. A downcycle is a way of cleaning out all excesses of the previous cycle. Just like a jungle fire, it cleans out all existing vegetation and new life begins. When people want to sell, they will sell regardless of external artificial measures. Interfering with natural processes create dislocations in other areas and create new problems to deal with.
Having said that, till very recently, I was arguing that markets were not cheap yet. Now the picture might have changed. The markets do look attractive now, based on traditional measures.
The BSE Sensex (8701) now trades at a PE of 10.63, Price to Book Value (PBV) of 2.25 and Dividend Yield of 2.12%.
The BSE Midcap index has the same values at 8.02, 1.46 and 2.46%
The BSE SmallCap index has the same values at 5.62, 0.91, 2.78%
Same is the case with NSE indices.
Historically, these are in line (by and large) with previous lows.
But before we jump ahead and buy, we don't know how future earnings would be. We dont know whether earnings will rise, fall or stay stagnant. If they rise, how much they would rise by? And what PE multiples would the markets give the markets? So even though stocks optically look attractive, this could be an illusion as earnings fall short of expectations. But, generally speaking, stocks might be worth buying into starting now...with a caveat that I could be wrong, earnings could disappoint, markets could go down...and hence you should invest in a manner that if you are wrong, you dont lose much.
Looking at the current picture, there is no hurry to buy anyways. The next few years could turn out to be an investor's delight. He would get stocks cheap, perhaps very cheap, and would not be in any hurry to buy. Keep cash handy.
Happy Investing!
Friday, October 24, 2008
Not protecting yourself
You buy motor insurance for your cars. That is mandatory by law.
You are wise and buy life insurance and medical insurance (If you don't, you should)
But what about investment insurance?
For most of our lives, things keep going along the same way they always do. Today is much like yesterday and tommorrow will be most like today. And we believe that the future will be like the past.
But there comes a time when the world changes upon us, at least in the investing world. The future is hardly like the past.
When such incidences occur, past experiences do not count. Asset prices crash and crash hard. A collosal amount of wealth is lost. This has happened in the past and will continue to happen in the future...one such time is now. A massive wealth destruction has occured in the almost all asset markets, especially in the stock markets.
While we are never able to predict such events, their timing or their magnitude. But we can stay awake to the possibility of such events occuring...and have a plan to protect our wealth when they do occur.
Else, paper gains do not take time to erode into huge losses...and into horror stories.
Look at the kind of damage many bluechip stocks (all are Nifty 50 stocks) have had over this year from their highs, and especially this month (data as on 23 Oct 2008 market closing):
Stock---------Fall
ABB Ltd.------64%
BHEL---------59%
Bharti---------45%
DLF-----------78%
Grasim--------70%
Hindalco-------71%
ICICI Bank----75%
Idea-----------74%
Infosys--------46%
L&T-----------63%
Ranbaxy------62%
Rel Comm-----72%
Rel Infra------83%
Rel Petro------67%
SAIL----------71%
Siemens-------73%
Sterlite--------78%
Suzlon---------83%
Tata Motors---78%
Tata Steel-----78%
TCS-----------59%
Unitech-------89%
And falling....
Not to mention many smaller companies that have seen greater damage.
Clearly, the need to protect your investment is never more clear than in the current environment. Of course, protection should have been deployed much earlier.
Wise investors manage risk and protect themselves when things go bad. There are many ways to minimise losses. One is to risk small. The other is to stay out of large downtrends (recognise it first naturally) by either staying with cash or using derivatives as hedges.
Regardless of which method an investor chooses to use, every investor should learn how to protect his/her portfolio...and learn not to live in hope and blind optimism.
You are wise and buy life insurance and medical insurance (If you don't, you should)
But what about investment insurance?
For most of our lives, things keep going along the same way they always do. Today is much like yesterday and tommorrow will be most like today. And we believe that the future will be like the past.
But there comes a time when the world changes upon us, at least in the investing world. The future is hardly like the past.
When such incidences occur, past experiences do not count. Asset prices crash and crash hard. A collosal amount of wealth is lost. This has happened in the past and will continue to happen in the future...one such time is now. A massive wealth destruction has occured in the almost all asset markets, especially in the stock markets.
While we are never able to predict such events, their timing or their magnitude. But we can stay awake to the possibility of such events occuring...and have a plan to protect our wealth when they do occur.
Else, paper gains do not take time to erode into huge losses...and into horror stories.
Look at the kind of damage many bluechip stocks (all are Nifty 50 stocks) have had over this year from their highs, and especially this month (data as on 23 Oct 2008 market closing):
Stock---------Fall
ABB Ltd.------64%
BHEL---------59%
Bharti---------45%
DLF-----------78%
Grasim--------70%
Hindalco-------71%
ICICI Bank----75%
Idea-----------74%
Infosys--------46%
L&T-----------63%
Ranbaxy------62%
Rel Comm-----72%
Rel Infra------83%
Rel Petro------67%
SAIL----------71%
Siemens-------73%
Sterlite--------78%
Suzlon---------83%
Tata Motors---78%
Tata Steel-----78%
TCS-----------59%
Unitech-------89%
And falling....
Not to mention many smaller companies that have seen greater damage.
Clearly, the need to protect your investment is never more clear than in the current environment. Of course, protection should have been deployed much earlier.
Wise investors manage risk and protect themselves when things go bad. There are many ways to minimise losses. One is to risk small. The other is to stay out of large downtrends (recognise it first naturally) by either staying with cash or using derivatives as hedges.
Regardless of which method an investor chooses to use, every investor should learn how to protect his/her portfolio...and learn not to live in hope and blind optimism.
Tuesday, October 14, 2008
Obsessed with bottoms
Have we hit the bottom in the stock markets?
These days people seem to be obsessed about finding bottoms. Television anchors keep asking so called experts about whether we have hit rock bottom and whether prices will now stop falling.
Some think that we made market bottom last friday. Others think that the bottom is not yet made. So far, the no-sayers are winning the battle as markets have kept going down.
Bottom seekers live with the hope that if the market bottom has been identified, they can start buying again and avoid losses.
But I have a few things to say.
First, bottoms can only be identified in hindsight. Much later than today, when we look back at what happened, we should be able to say whether markets did make a bottom on 10th October 2008 or not. Sitting in the present, it is impossible to call a bottom except by pure luck.
No one can spot a bottom except in hindsight, after it has been formed. Trying to find bottoms is a meaningless exercise, an exercise in futility.
Secondly, we invest to make money, not to not lose money. While not losing a part of the game, the basic idea is to make money.
So the key issue is whether we should be able to make money regardless of whether a bottom is made or not, identified or not. Even if we are able to call a bottom correctly, if prices do not go up after we buy, we are not going to make money. In fact, we would pay an opportunity cost of not having deployed the same money into other investments like say fixed deposits (which currently are offering 10-11% returns).
What we as investors should focus on is the prospects of gains rather than finding bottoms. If we think that prices are not headed up, it does not make sense to buy even if we buy at the bottom.
Look at the prospects of gains in preference to finding market bottoms. Keep observing the market with an open mind and look for signs that the markets are headed higher.
It is better to wait for a bottom and then let the markets tell you that it is possibily going up. This is an easier task and more profitable one than trying to find bottoms.
These days people seem to be obsessed about finding bottoms. Television anchors keep asking so called experts about whether we have hit rock bottom and whether prices will now stop falling.
Some think that we made market bottom last friday. Others think that the bottom is not yet made. So far, the no-sayers are winning the battle as markets have kept going down.
Bottom seekers live with the hope that if the market bottom has been identified, they can start buying again and avoid losses.
But I have a few things to say.
First, bottoms can only be identified in hindsight. Much later than today, when we look back at what happened, we should be able to say whether markets did make a bottom on 10th October 2008 or not. Sitting in the present, it is impossible to call a bottom except by pure luck.
No one can spot a bottom except in hindsight, after it has been formed. Trying to find bottoms is a meaningless exercise, an exercise in futility.
Secondly, we invest to make money, not to not lose money. While not losing a part of the game, the basic idea is to make money.
So the key issue is whether we should be able to make money regardless of whether a bottom is made or not, identified or not. Even if we are able to call a bottom correctly, if prices do not go up after we buy, we are not going to make money. In fact, we would pay an opportunity cost of not having deployed the same money into other investments like say fixed deposits (which currently are offering 10-11% returns).
What we as investors should focus on is the prospects of gains rather than finding bottoms. If we think that prices are not headed up, it does not make sense to buy even if we buy at the bottom.
Look at the prospects of gains in preference to finding market bottoms. Keep observing the market with an open mind and look for signs that the markets are headed higher.
It is better to wait for a bottom and then let the markets tell you that it is possibily going up. This is an easier task and more profitable one than trying to find bottoms.
Sunday, October 12, 2008
A few lessons from the crash
The stock markets have crashed big time. I dont think we have ever seen such dramatic collapses in the Indian markets. This is highlighted by the worst ever weekly performance ending this week. And the week had only 4 trading days!
But first, let me apologise for what I am going to say next. I almost am tempted to say, "I told you so". Readers would have noticed the very cautious slant in my previous blogs and mails since March of this year. Of course, I never dreamt of such intensity, but I had sounded caution. So an apology is in order if I sound self-congratulatory here.
But what lessons can we, as investors, derive out of the current crisis? While there are many and I would like to highlight a few ones.
(1). The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.
(William Shakespeare - Julius Caesar I.ii.)
No one has the ability to totally comprehend our economic world. The world is far too complex and has unimaginable linkages for us to get an idea of how one parameter would change what others and by how much. What started as a country specific (USA) problem in one sector of the economy (housing) has now become a world wide credit crisis that threatens to undermine the entire financial system of the world. First it was housing prices, then investment banks, then mortgage lenders to commercial banks to now trade financing (the latest is on letters of credit or LCs). All assets are getting decimated, stocks, commodities, real estate...except the US dollar and precious metals like Gold. Seemingly insulated countries like India are witnessing high linkages via capital flows.
The lesson to draw is that unexpected things do happen in the world, things that so beyond the ordinary that they change the future. While no one can really predict what and how intense such changes would be, it a wise idea to be aware that they can happen and more importantly, be prepared to protect your wealth or create wealth for yourself when such events occur.
The typical market expert has a standard advise. Hold stocks for the long run, or use a SIP to invest, etc. Such advise of ok in normal times. In extraordinary times, such advise causes a lot of pain and hardship. Investors should learn how to avoid such large losses when unprecedented events occur. Avoiding large losses in bad times is good both for our financial and physical health.
(2.) Common sense is not so common afterall.
After 5 years (2003-2007) of a boom, people started taking things for granted: that India will keep growing at 9% for the next 50 years, that capital will keep flowing in forever because our country is so great, that stocks will keep returning 25% per annum ad infinitum. Guess what? Trees dont grow to the skies. In the big boom, the GDP expanded at higher than historic rates, EPS bases became bigger. Inflation set in and interest rates rose higher. Common sense mandated that the future would not be anything like the past. Common sense mandated that growth will slow down and earnings growth will slow down. But who cares for acquiring common sense when dreams and hopes abound? And when past experience suggested that good times would stay forever. The person who acted with common sense would have been able to protect his/her wealth better than the others, including many experts who are not feeling all that rich anymore.
(3). The lesson we learn from history is that we learn nothing.
How many of us have seen past debacles? At least we have heard about them or read about them, if not experienced them. Be it the bull market in 1985 (VP Singh cut direct taxes), Harshad Mehta time in 1992, FII driven optimism (1994) or the technology bubble in 2000, large rises over short periods are unsustainable. In each bust, stock markets fell 50% or more. That is the very nature of capitalism. Sudden booms bring in their own problems which invariably lead to a reverse cycle. But in each boom we feel it is different. There are always very plausible and logical sounding reasons for why it is different each time. In reality, it never is different. Capitalism makes super-normal returns disappear in no time. To think otherwise is a folly.
While we can never exactly say when the cycle will reverse, we can say with confidence that it will. While I do believe that the Indian stock markets are in a secular bull phase, cyclical downturns are to be expected (unless there is a systemic collapse, in which case all bets are off) and one should be prepared for such.
So, in closing I would like to state a few things:
-Seek competant advise, not the advise that is dished out to the masses. If every expert gives the same advise, how many among them would truly be competant?
-Learn to sell. Selling is the key to outperformance
-Get real. Expect the unexpected and have a plan to deal with it if the unexpected comes about. Do not live in denial
-Above all, have a plan. Period! Much pain comes because people do not have an investing plan, but rather invest haphazardly.
Happy investing!
But first, let me apologise for what I am going to say next. I almost am tempted to say, "I told you so". Readers would have noticed the very cautious slant in my previous blogs and mails since March of this year. Of course, I never dreamt of such intensity, but I had sounded caution. So an apology is in order if I sound self-congratulatory here.
But what lessons can we, as investors, derive out of the current crisis? While there are many and I would like to highlight a few ones.
(1). The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.
(William Shakespeare - Julius Caesar I.ii.)
No one has the ability to totally comprehend our economic world. The world is far too complex and has unimaginable linkages for us to get an idea of how one parameter would change what others and by how much. What started as a country specific (USA) problem in one sector of the economy (housing) has now become a world wide credit crisis that threatens to undermine the entire financial system of the world. First it was housing prices, then investment banks, then mortgage lenders to commercial banks to now trade financing (the latest is on letters of credit or LCs). All assets are getting decimated, stocks, commodities, real estate...except the US dollar and precious metals like Gold. Seemingly insulated countries like India are witnessing high linkages via capital flows.
The lesson to draw is that unexpected things do happen in the world, things that so beyond the ordinary that they change the future. While no one can really predict what and how intense such changes would be, it a wise idea to be aware that they can happen and more importantly, be prepared to protect your wealth or create wealth for yourself when such events occur.
The typical market expert has a standard advise. Hold stocks for the long run, or use a SIP to invest, etc. Such advise of ok in normal times. In extraordinary times, such advise causes a lot of pain and hardship. Investors should learn how to avoid such large losses when unprecedented events occur. Avoiding large losses in bad times is good both for our financial and physical health.
(2.) Common sense is not so common afterall.
After 5 years (2003-2007) of a boom, people started taking things for granted: that India will keep growing at 9% for the next 50 years, that capital will keep flowing in forever because our country is so great, that stocks will keep returning 25% per annum ad infinitum. Guess what? Trees dont grow to the skies. In the big boom, the GDP expanded at higher than historic rates, EPS bases became bigger. Inflation set in and interest rates rose higher. Common sense mandated that the future would not be anything like the past. Common sense mandated that growth will slow down and earnings growth will slow down. But who cares for acquiring common sense when dreams and hopes abound? And when past experience suggested that good times would stay forever. The person who acted with common sense would have been able to protect his/her wealth better than the others, including many experts who are not feeling all that rich anymore.
(3). The lesson we learn from history is that we learn nothing.
How many of us have seen past debacles? At least we have heard about them or read about them, if not experienced them. Be it the bull market in 1985 (VP Singh cut direct taxes), Harshad Mehta time in 1992, FII driven optimism (1994) or the technology bubble in 2000, large rises over short periods are unsustainable. In each bust, stock markets fell 50% or more. That is the very nature of capitalism. Sudden booms bring in their own problems which invariably lead to a reverse cycle. But in each boom we feel it is different. There are always very plausible and logical sounding reasons for why it is different each time. In reality, it never is different. Capitalism makes super-normal returns disappear in no time. To think otherwise is a folly.
While we can never exactly say when the cycle will reverse, we can say with confidence that it will. While I do believe that the Indian stock markets are in a secular bull phase, cyclical downturns are to be expected (unless there is a systemic collapse, in which case all bets are off) and one should be prepared for such.
So, in closing I would like to state a few things:
-Seek competant advise, not the advise that is dished out to the masses. If every expert gives the same advise, how many among them would truly be competant?
-Learn to sell. Selling is the key to outperformance
-Get real. Expect the unexpected and have a plan to deal with it if the unexpected comes about. Do not live in denial
-Above all, have a plan. Period! Much pain comes because people do not have an investing plan, but rather invest haphazardly.
Happy investing!
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