Aig, lehman, Bear sterns, Paulson, Ben Bernanke, Fed, ….if these words have been ringing in your head, and you do not understand what really happened, join me!
There are many like us …so as usual I searched and a friend obliged. So here is the link - please read it:
I hope you like it. It is in simple English…however if you have any queries, I will happily reply to them!
Welcome the Bear Markets!
Although we saw a furious short-term rally last fortnight, we have entered into official bear markets territory as of early this month. (In the US bear markets are defined as a drop of 20% or more from a previous high.)
This is a good thing. Smart and Legendary investors understand this. Ordinary investors don’t.
If you haven’t spent much time buying stocks getting excited about a bear market doesn’t just sound counter-intuitive, it sounds nuts. After all, how can you feel appreciative watching the value of your life-savings grind lower? Life was so much fun when you were buying at 19000 and the index went to 21000 was it not?
However, if you are an investor, think a few months ahead. Or even years ahead. Think of Viswanathan Anand as you financial advisor! The kind of returns that you can get after a 30% fall in the market is phenomenal. Do not trust me. Ask your investor about a paper made by Mr. Prashant Jain of Hdfc mutual fund. That document is available on the Hdfc mutual fund site and in the inbox of your advisor. Since I was not sure about copyright issues, I did not reproduce it here.
Every stock investor knows that you’re supposed to buy low and sell high. Bull markets give you a chance to sell high. Bear markets give you a chance to buy low. So if you are 22 years of age and are planning to buy stocks for the next 45 years, you need more bear markets than bull markets J .
If you want to prosper during the next bull market - the one that will propel the averages to new highs in the years ahead – MAYBE now is your chance to pick up some bargains. This is not to suggest that the markets have finished their fall. Maybe they will fall further, but hey investors - Don’t Let Bear Markets Scare You
Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets. So they do just the opposite, buying high and selling low. In fact a friend calls it a family hobby – buying high and selling low!
Yes, the market has fallen sharply over the past eight months – Jan to Aug ‘08. And it may fall further in the weeks ahead. Still, this is an enormous opportunity for long-term investors. Too bad most of them don’t see it that way.
We give too much credit to the guys with white skin – and that is stupid. Indian banks have not leveraged 1: 30 times like a Bear Sterns had done. Or like Lehman brothers or like Citibank. Reddy of RBI has not put 91 Indian institutions on “watch”. However, we have beaten down our companies by a similar margin as the American companies!
Read Dr. Jeremy Siegel, author of “Stocks for the Long Run, Read John Templeton, ….see how Warren Buffet and Peter Lynch have celebrated bear markets.
Bear in mind, no one when can tell you when the next bull market will begin, how long it will last, or how high the market will ultimately go.
At Berkshire Hathaway’s annual meeting in May, Warren Buffett said “I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” Why? He knows he owns great businesses. He would like to own them even cheaper.
During bull markets you hear “buy, they do not make stocks anymore” and in bear markets they tell you “sell, or at some time there will be no buyers”. Both are wrong. Completely wrong. Markets go up and go down. Do an SIP. That makes sense. Do it now. It makes more sense.
Why should you know Nagnath’s view on the market? When the whole world was pessimistic about India he predicted huge cash inflows. I may not be too wrong if I say that he predicted the bull run in 2002, not in 2008! He always has a balanced view and gives excellent quotes and views to the media.
This is what he had to say at the India equity show - a show organised by www.myirisplus.com at Worli, Mumbai.
When quizzed about the Golden rule of investing, Nagnath quoted somebody (Anon) and said “The man who has the Gold makes the rules”. Apart from sounding good I guess what it means is the importance of cash flows. If the valuations are good, the market is attractive. However for the market to go up, there has to be somebody who puts in the cash. My personal view is that the money can come in from Unit linked Insurance and mutual fund sales - to compensate and more than compensate the FIIs taking money out of the country.
One thing apart from liquidity predictions and analysis is that many people who predict things may get it wrong. When the US $ started getting weak and there was a need for many Americans to go away from the US $, the cash flow caused the Emerging Markets and commodities to boom. Now if there is a reversal, we need to be ready for the same.
When markets go up, we rationalise. When markets go down, we rationalise.
Then he spoke about “regression to the mean” - if you are expecting say 15% p.a return over a 15 year period and you have had a bull run for 4 years where you got say 100% return, maybe you take some profits and keep it away. Similarly if you have got a -13% p.a. for say 4 years maybe you pump more money into the market. My take is “continue your SIPs, stay away from Unit Linked plans” theory will work well.
What causes this tendency of the market to run far ahead of earnings or lag the market for long periods of time? It is cashflow - created by euphoria or by excessive pessimism.
Nagnath also said it is difficult to take a long term view because of the crisis in the US and European markets. He called it an unprecedented short term market crisis - and similar crisis seems to have hit the western world only in the 1930s.
He took a nice dig at Bank balance sheets - and said that after the sub prime crisis, in a bank balance sheet if you saw on the “left side” there was nothing right and therefore quite obviously when you saw on the “right side” there was nothing left. He said that banks have very poor quality of assets funded by high leverage. We saw this in case of Bear Sterns, and now Lehman brothers is raising money for meeting its capital adequacy needs.
About the future Nagnath felt that the markets in the next 12 months are likely to be tough. He had no clue on whether we are finished with the sub prime crisis, are at the half way mark or in which leg of the journey we are. He felt the markets will be worse before it got better. He also predicted a market rally as and when the oil prices hit US $ 100 on the way down.
For most small investors the guys who come on TV with a slick suit are “more knowledgeable” than the guy in a dhoti. That is because as Indians we like “phoren” rather than Indian. So is our quest for knowledge.
Those people who have been long enough in the market know that one man who used to come to the “ring” to buy and sell shares or just to the BSE building as a visitor was Mr. K R Choksey. His ability and fundamental knowledge about creating wealth is legendary. He wore no suit. You must read this post by Alexander Green in a news letter to his investors. It talks about his experience at Merrill Lynch
Unmasking the Bull at Merrill Lynch
Dear Investment U Reader,
Let me tell you about the dumbest career move I ever made.
In 1999, Merrill Lynch began aggressive recruitment efforts. I really wasn’t interested. But, ironically, the more I begged off, the more money I was offered.
Unfortunately, my old firm provided the necessary nudge by informing me one day that I was prohibited from selling the shares in my pension - which had soared during the Internet mania - unless I left the firm.
Because I was one of the largest employee shareholders - and felt the technology bubble was likely to end badly - it provided a strong incentive to take Merrill’s offer.
Eventually, I did.
Big mistake. For starters, I was astonished to see that Merrill was pounding the drum for the very Internet darlings I had abandoned my old career to sell. For example, it had a “Strong Buy” on Lucent, Nortel, JDS Uniphase and Global Crossing - not to mention WorldCom, Enron and Adelphia.
I fired off a note to the analyst recommending JDS Uniphase at $150 a share. “How can you recommend a stock with such an insane valuation?”
“Valuation is only one of our metrics,” was his curt reply.
“But if that’s all wrong,” I wrote back, “what difference do the others make?”
I never heard from him again. JDS declined 99% over the next several months.
Merrill also has an unparalleled record in hiring and firing chief investment strategists. In the late 90s, Charles Clough was pushed out for being too bearish. His successor Christine Callies remained stubbornly bullish throughout the bear market that followed. That led to her being replaced by Richard Bernstein, who bragged at the market bottom in 2002 that Merrill had “the lowest equity allocation on the Street.”
Despite its blue chip image and gold-embossed brochures, Merrill reminds me of the computer HAL 9000 in Stanley Kubrick’s “2001: A Space Odyssey.” Completely calm, completely rational - and totally out of control.
I’ll never forget my first day at the firm. A broker on my floor stopped by my office to welcome me. After chatting a few minutes, he told me he had a great investment idea to share.
I told him I was all ears.
“Get your clients to pull out the equity in their homes and invest it with one of our Internet and technology managers,” he said, his face beaming.
“Why would I do that?” I asked.
“Don’t you get it?” he said, looking a bit surprised. “First you get paid on the mortgage origination. Then you get paid on the assets under management every quarter. It’s brilliant.”
So brilliant, in fact, that nine years later his clients have likely paid tens of thousands of dollars in fees and lost most of the equity in their homes.
I could go on, but I’ll stop here. Merrill wasn’t my kind of place. After a few months I resigned, returning most of the big signing bonus I received.
My experience with the firm may have been atypical. I’m sure there are capable, qualified people at Merrill who are doing their best to serve their clients.
That wasn’t my experience, however. My experience was that most investors need Merrill Lynch like a fish needs a bicycle.
Of course, it’s not just Merrill. The standard line on Wall Street is that the capital markets are so complicated and your financial circumstances so unique, you can’t be trusted to run your own money. You need a professional.
But do you, really? With a little education and a bit of discipline, you can run your portfolio yourself at a fraction of the cost of using a full-service broker.
And when you manage your own money, you don’t have to worry about conflicts of interest, self-serving advice, or hidden fees and expenses.
This story is obviously Alexander’s. The story is not about Merrill. Just cut and replace this name with Bear Stenrs, Citibank, JP Morgan, or in the Indian context with names like JM, Kotak, Icici, hdfc. it really does not matter - it will all sound the same. This leads us to the story I heard at the India Equity show - “it is difficult to teach something to a person, if the learning goes against his making a living”
Ben Bernanke, Alan Greenspan, P Chidambaram - all three are men with above average intelligence, and reasonably competent in their jobs. However, one thing common to all 3 of them is all of them are trying to play with the rules of economics. They do not let market forces play to the fullest extent.
Alan Greenspan bailed out LONG TERM CAPITAL MANAGEMENT - not very long ago in the USA. Ben bailed out (i have called it a burial in another post) Bear Sterns -both Investment banks which were above oversight!
PC on the other hand is playing around with the word inflation. He says that the inflation is 7% or thereabouts while holding petrol prices low. He calls up steel, sugar, cement manufacturers to hold the price line while giving a nice salary revision to his government employees! Then he plays dirty with the farmers by banning the private sector from procuring wheat. All these steps are likely to cause extreme pain to the new government that is likely to come in after the election. God save the next FM. But till then if you are a shareholder of IOC, HPCL, BPCL, Tata Steel, you have to bear the brunt and hope for a quick election call!
Living in a “socialist” country and having heard slogans like “garibi hatao”, nationalisation, etc. there was some chance that RBI governor does not believe in market economics. But USA? Aw, come on Ben has to believe in free markets, or so we thought. No. He does not.
He comes up with aspirin for patients who need a triple by pass surgery. The Fed is clearly responsible for keeping the interest rates too low for too long and helping the real estate bubble to build. Firms like Bear Sterns should be allowed to die.
Let us take an example. Say there are 5 auto manufacturers - ranked A to E - where A is the best and E the worst. All of them put together make 5Lakh cars. Now if the demand was only for 4 Lakh cars, it is possible that the biggest sufferer is E. So E will bleed and slowly die depending on how well he is capitalised. This will bring the capacity in the industry to 4L cars - and all the other manufacturers will start earning some profits. Sounds simple, but broadly this is how it is supposed to work. Enter BIFR.
BIFR was another stupid socialistic heritage which allowed manufacturer E to be protected against creditors, interest was waived for a certain period, etc. and this allowed E to live a little longer than what the cruel free market would allow. This actually became a hindrance for the freee markets.
Ben by saying Bear Sterns is too big to fail, he has increased the pain in the system. People who speculated wildly have to die - cruelly that is the reward for those who were careful. If excesses are not punished, there is also a moral hazard. Kids will grow up irresponsible and blame Ben!
Imagine your spouse / kid / parent saying “I over spent because credit was available, and the interest rate was only 2% per month”. It becomes your duty to remind them, that it is the prinicipal, stupid, not the interest that is the problem. Only if Ben would wake up.
but surely he has created pain. Those of us who have had a check up KNOW that we need a surgery to remove the 3 blocks. Those who have not gone for a check up are watching TV and hoping Ben is right. No he is busy creating a gold bubble, an oil bubble, and a real estate bubble - this time he is ensuring that the whole world is in its grip. There could be a crash landing - beware seat belts are of no use once the plane hits the water!
