The markets – capital markets especially is a great teacher. However, the characteristics of this teacher are unique:
1. Takes the fee upfront
2. Lessons are taught the hard way, but students do not remember it long enough
3. Never negotiates fees – the dumber the student the higher the fee, and no mercy is shown!
There are some lessons which I am just enumerating here – you can amplify it when you want it:
a. Market movement is normally violent. Volatility is a market characteristics. We watch the market for a few years (months, weeks, hours) and quickly come to a conclusion that “markets are now quite”. Something like a kid seeing a tiger in a cage and saying, “Can I cuddle it?”.
b. Leverage hurts, leverage hurts, leverage hurts. I am strictly anti leverage. I have been happy doing real estate deals, car deals, etc. WITHOUT leverage. In a bad / slow market – combined with a falling market, leverage can kill. Look at a share called Cholamandalam DBS. Came down from Rs. 370 to Rs. 32. Compared to that Satyam came down to Rs. 34! Which is worse leverage or fraud? Ouch!
c. We are in a slowdown, US is in a deep recession. If Obama does not continue with the tradition of convincing the average American that he can continue to live beyond his means and the rest of the world owes him a living, things will get worse. Really worse.
d. Value buying is fashionable. Value buying looks at numbers like Price to Book value ratio, dividend yield ratio, etc. PLEASE DO NOT DO THIS BLINDLY. If you do not trust a balance sheet (ha ha) ratios make no sense. So be careful.
e. Companies are in a slowdown means they are in a temporary problem. They will not die, they may continue to bleed.
f. Many stocks are seriously underpriced. However tooooo maaannnyy stocks are terribly over-priced. Please know the difference between price and value. It is tough but worth learning.
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