Saturday, September 6, 2008

Market ups & downs – What should you do now?

On Tuesday we witnessed a strong rally in the equity markets after a negative gap down opening. I bet none would have expected a rally of this nature to happen. At one point of time, Sensex was up 551 points, Nifty was up 164 points and Crude was down to $106 levels. I remember earlier in the day or a day before, a market veteran predicting Sensex levels of 10000 levels. He was a strong bull earlier but suddenly changed track. Now he is back with views that of a bull. In my view, predicting Sensex levels has become an exciting game, something that provides nothing beyond entertainment. You are right sometimes and wrong sometimes.

This reminded me of one of Wall Street’s famous joke which goes like this.

A stock analyst and a Wall Street broker went to the races. The broker suggested betting $10,000 on a horse. The analyst was skeptical, saying that he wanted first to understand the rules, to look on horses, etc. The broker whispered that he knew a secret algorithm for the success, but he could not convince the analyst.

"You are too theoretical," he said and bet on a horse. Surely, that horse came first bringing him a lot of money. Triumphantly, he exclaimed: "I told you, I knew the secret!"

"What is your secret?" the analyst asked.

"It is rather easy. I have two kids, three and five year old. I sum up their ages and I bet on number nine."

"But, three and five is eight," the analyst protested.

"I told you, you are too theoretical!" the broker replied, "Haven't I just shown experimentally that my calculation is correct?!"

Likewise one right guess and one feels confident of having cracked the code. If you happen to listen to market analysis carefully, there will be one bullish analyst and one bearish analyst. Both of them sound convincing. You might then wonder “Is this rally for real though?”

So you look out for cues in the international market and are glued to the Dow. The Dow and Nasdaq open with a bang with stocks registering good gains on the drop in crude prices. At the same time gold opened lower to around $ 802 an ounce.

Worries of slowing global demand and the fact that Hurricane Gustav was downgraded to category 2 helped ease oil prices significantly. Gustav was then further downgraded to a tropical depression. September generally takes the cake for being a hurricane month and there are 2 more hurricanes in the pipeline. This will have good or bad impact on the direction of oil prices. Oil has corrected by more than 30% from its peak. However oil is still at significantly higher levels than what it was the same time last year. It was in the region of $65-74.

Oil has still a long way to go on the way downward if any further rallies are to be expected. As oil prices cool off, you will see inflation and the macro numbers improving and this will create a strong platform for the next leg of the rally. However we are not yet out of the woods because one bad macro headline has the propensity to tumble global markets and also take Indian markets lower. The situation on the ground is that any good or bad headlines can push the market accordingly in respective directions.

In one of my previous columns, we had mentioned about rumors on Lehman Brothers. Tuesday witnessed a rally in Lehman shares after Korean Development Bank confirmed news of being in talks to buy a stake in Lehman. Lehman Brothers one of the biggest investment banks in the US is down almost 75% from its 52-week high of $67.73 to around $16. What would happen if Lehman or any other US financial institution (including some of the insurance companies) bites the dust? The markets might not take this lightly but at the same time it can be argued that the market has already discounted such news in the stock prices of these firms.

So what should you do in today’s market?

At the risk of sounding repetitive, here are some principles.

Don’t be concerned about what your friend, family member or other person is doing. You have to win your race but that does not mean you need to beat everyone else. Each one of us can be a winner provided we know what we want. If all you need is 8% returns, realign your investment accordingly. If you need 12-15%, then realign your portfolio in terms of equity.
Don’t aim for the highest returns because there is nothing called as highest returns. It’s all relative to some other number. Most sins in the equity market are committed when we aim for the highest returns. If you have got 30% from equity in a year, why should you be concerned if someone else has got 60%? You don’t know the risk that has been taken or whether it was an act of luck (as discussed in the horse racing story). You would do well to stay away from quacks who tell you what will give you the highest returns. Just day before there was a story of how a couple duped several High Networth investors including doctors, professionals and a yogi of several crore of rupees by promising to double their money.
Don’t invest in equities if you are not in it for the long haul (Trading is different and not meant to be confused with investing). Today the average holding period of a stock might be a year or slightly more. There will be dips in the market along the way so take advantage of these downturns by investing in a staggered fashion, be patient and demonstrate a willingness to act when others don’t.
- Amar Pandit

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