Be a contrarian…if you have the guts!

Some of the great classic advice that you will hear in an economy that slows down are the following:

1. Shift to cash – it is safe, at least it will not go down!

2. If you must invest, be safe get into gilts – it is almost capital protected, interest rates can only go down, so you will get “good” returns.

3. If you still insist, buy “large cap” stocks – like L&T, Bhel, Reliance, SBI, Hdfc – how much further can they fall?

Surely you must have heard all this advice, have you not?

Let us look at each one of them!

Normally the least attractive asset class gives the best return – over a short period – but this logic cannot be extended indefinitely. For example equity has given 19% return over the past 25 years, but -40% over the past 6 months. Why do we take the last 6 months figure and extrapolate for the next 35 years? This is plain stupid. So will cash be the best asset class? You ought to be joking if you are thinking say for 15 years.

Debt products are good and surely have a place in your portfolio – for portfolio protection for short periods of time. However debt products which give -5% return (taking taxes and inflation into account) cannot create WEALTH – can it?

When the markets go through a turmoil shift to LARGE caps – they will recover first. Great in theory. However liquid shares are the LIQUIDITY providers. So every person who is liquid and wants to invest will invest there – so these shares will always quote at a high premium compared to other shares!

So what to do now? let us see in a few days time….

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