At last the market went up by almost 500 points yesterday. Not bad for a market which has had a very rough year so far, with the Sensex with more than 50% loss for the year. This is literally the worst market crash since 1993. The bull run of 1992 was followed by a 46% fall in the next year. The US media is already calling it the worst year since the great depression of 1929! (oops that is the way the media works!).
We’ve been living with the downward movement in the markets for months on end, and I am at a loss for words that I have not already blogged several times before! Here is what I keep reminding myself while trying to retain sanity:
1. The market is inherently volatile, and there is no telling when the volatility is going to stop (or where the bottom is). Only invest money that you will not need for about 3-5 years. Some experts have said markets can fall 30% from now (Shankar Sharma in an interview to Cnbc)
2. The US is undoubtedly in a recession—even the bureaucrat says that! And is going to be in a recession longer than one thinks. It could be more severe than usual. However, that does not mean the end of the world. India will continue to grow – and at a clipping rate. Even if you take Merrill Lynch’s report we will grow at 6% per annum. We have lived through many tough times before, and we will live through this one, too. I trust Mahesh Vyas at CMIE more than I trust ML. And Mahesh has said 7%, let me bet on that.
3. The fundamental value of a stock is the value of the discounted cash flow the underlying business will generate in coming years. The cash flows of our companies are not as volatile as stocks have been recently. The company working is like a whip, the market is like the edge of the whip – moves more and stings!
4. While our companies are dealing with the slow down, and the US companies with their recession, and we are likely to see a material reduction in earnings in the coming quarters, this does not mean that the companies are in permanent decline.
5. The market likes to extrapolate recent short-term trends, but those extrapolations lead to wrong conclusions in periods like this. Basic problem is our today is not like our yesterday, but we believe our tomorrow will be like today. God Bless us all!
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