The clock turns full circle: where do we go from here?

There are a lot of differences in the situation prevailing at the beginning of January 2008 and the end of June 2008.

In January the stock markets were in euphoria, breaking new records everday on the upside. Liquidity was driving the markets mad despite the unearthing of the US subprime crises. Analysts and Brokerages were predicting sensex levels of 25000 and above in the short term. Rupee was holding strong against the dollar and the predictions were af rupee appreciating to Rs36/ dollar by the end of 2008. Everyone was bullish on the growth prospects of Indian economy. The index of Market optimism was more than 90%, that means 90 out of 100 people beleived in pumping money into Indian equity. Even then there were 10% of the people who beleived that fundamentals of the markets were not supporting the overall optimism, so they were selling in the markets. They may have been branded as fools, because they may seem to have lost the oppotunity in the short term. These minority stakeholders must be a smiling lot today. Things changed dramatically within a span of a few days and the markets came crashing down by over 20%.

Today, in June 2008 the situation is reverse. Everybody is talking about the equity markets with a negative bias. The market continues to fall despite the growth prospects of Indian markets remain fairly optimistic. The market is flooded with negative news. The rupee is being predicted to depreciate to Rs45/dollar by the end of the year. The index of Market optimism is down to 10%, that is 90% of the stakeholders are running away from the markets, even at the cost of booking huge losses. It's again those 10% of the people who beleive that the valuations of the market have become exteremely attractive, and they are buying selectively inti 'Blue Chips'. In the short run the market may go down further, making them look foolish, but these will be the paople who will have the last laugh 6 months from now.

However, there is one similarity in the situation prevailing in the beginning of January 2008 and now. Both the situations point to a trend reversal. While January 2008 siganalled the end of the bull phase, June 2008 is likely pointing towards the end of the bear phase in Indian markets. Just one good news can change the fortunes of the markets. It could be the decline in oil prices to the level of US$ 100/barel. It may seem wishful thinking, but it is very likely to happen with the liquidity tightening measues initiated by Asian Central banks.

Its time to decide whether you belong to the 10% tribe, or will like to go with the majority opinion. Remember 'Fortune favours the Brave'.

How to survive in choppy markets

Anyone who has seen the one way movement in the markets for most part of calender 2007 is perplexed at the choppy behaviour of Indian stock market eversince the beginning of 2008. As most investors are governed by strong emotions, it is very diificult to survive the choppy markets. If we do not develop the survival instincts we will tend to loose huge money in this uncertain environment.

What went wrong with the 'India growth story'? Overseas fund managers have withdrawn more than US$3 billion during the first three months of 2008. The adverse turn of events on the global economic front are partially responsible for this turmoil. Emerging markets are grappling with higher inflation as the commodity prices have risen to new highs. Crude prices hitting new highs is a double whammy for net importers like India: High oil prices coupled with the falling rupee is putting pressure on the fiscal deficit of the govt. The falling rupee has also increased the risk aversion of FII's vis-a-vis India, because they find better opportunities elsewhere for the time being. There is a reasonable consensus among analysts for a slowdown in Indian GDP growth to between 7-7.5% this fiscal.

The individual investor is caught at the crossroads, baffled and bruised. For those who have invested for long term it is a time to forget looking at the indeces for a while and relax. Things will start to improve within the next 4-6 months. For the active investors it is time to do some portfolio churning. Everytime there is a change in the economic fundamentals, different sectors take the lead on the markets. The performing sectors of 2007 like infrastucture, power media and reality have become laggards, and the laggards of the last bull run like Pharma, FMCG and Technology have taken over the leadership mantle. The sensex has fallen about 25% in 2008 till date, but sectors like capital goods (infrastructure, power etc.) have declined over 40%, whereas media sector has declined by over 40%. On the other hand Pharma has given a growth of 14%, and returns on FMCG and IT sectors have been marginally negative.

So it can be seen from this data that we can survive bad patches in the markets by following the principle of portfolio churning.

Benjamin Graham: Lessons in Value Investing

• Benjamin Graham has been called the father of 'Value Investing'. Several Investors, including the legendry Warren Buffet have benefitted immensly from his visionary investment techniques. Benjamin Graham believed that each security has an intrinsic worth that is recognised by the market in the long run. Here are famous qoutes from Benjamin Graham's 'Art of Value Investing':
  
  * The secret of sound investment can be summed up in three words: "Margin of safety"

* Investors should treat themselves as 'Owners of a business' rather than owners of a stock quotation, so focus should be on the underlying soundness of business.

* If you are sure that the markets are too high, it is better to keep your money in cash or Govt. Bonds rather than put it in 'Bargain stocks'.

* It is a great practical mistake to waste time on 'Forecasting the markets'.
Emotional decisions should not be allowed to overrule the market fundamentals. Market gives ample opportunities to buy good stocks at the right price.

* When beggers and shoeshine boys tell you how to get rich, don't be under the illusion that one can get something for nothing. This has been proven right several times in the past: during the US stock market crash of 1929, Harshad Mehta scam of the 1980's and again the recent stock market crash of January 2008. Yet public memory is too short, so we tend to repeat the same mistakes time and again.

Graham's investments mainly focussed on bargain stocks based on earnings potential or asset values. For this one needs to scan the balance sheets of the companies. Currently, with the markets in turmoil due to global oil crises and rising inflation, offer many such bargain buys. One just needs sometime to look at their balance sheets (most of the companies have already declared their annual results).