fuller version of this article of mine appeard in retuers under this heading:

The Meltdown’ What to do?

 

As a colleague in the office told me, if you want to fail and you are expecting a storm, fail first!

So some of the “early birds” got protection, and then the protection vanished!
The Fed is run like any other bureaucracy, it cannot be policed. Why did Bear Stearns get bailed out (I have called it a burial elsewhere) and Lehman did not? Search me!

 

So here is the list

 

First it was Countrywide.

Second was Bear Stearns.

Then Freddie and Fannie.
Then Lehman Brothers filed for Chapter 11.
Bank of America bought Merrill Lynch.
One of the biggest insurers AIG is seeking a multi – billion bridge loan from the Fed.

 

If you see the manner in which the market priced these shares in the past few months (more appropriately past few weeks) it kept telling you what the auditor, regulator, rating agency, media refused to tell you.
 

Indian market will also be hit and hit hard. As an investor, what should you do now?

Well, you can panic and sell! That hasn’t been terribly productive in the past. Or, you stick with your discipline – provided it is a good one.Stick to the fundamental principles of investing: “Buy quality. Diversify broadly. Asset allocate properly. And think long term“.

Let’s take a closer look at each of these.

It is true that all shares are down, both here and abroad. But if you own great companies, they will recover when this storm passes When you see HDFC, SBI, Larsen & Toubro, TCS, all beaten down around 20% from current valuation; maybe it is the right time to buy?

 

It was in 1992 that we had Harshad Mehta as a problem, then it was Ketan Parekh, then it was the dot bomb…

 

Internationally it was the Russian default (in classrooms we say the “sovereign” cannot default) which happened about 10 years ago. It took LTCM along with it.

 

Of course then there was 9/11; people redefined risk. They thought there would be a world war and for some time there was chaos in the world markets. However, nothing really happened; we did not have a choice, so we went about doing our routine work.

Today all those crises seems like nothing more than a blip on the charts.

Frankly, I think this crisis may take a little longer to correct. It is about Americans realizing that the rest of the world does not owe them a living. Whenever Americans have been threatened they change the rules that the world has to live by! They still have to grapple with their credit card debt, student loan, car loan, and home mortgages. If they all start defaulting (this is called moral hazard) hoping that Uncle sam will bail them out, the US $ will be worth one Yen!

 

Remember when they did not have enough gold, and they defaulted (well technically!) they removed the “gold standard”.

 

When they did not see any strength in the dollar, they convinced (you know how the mafia “convinces”) the Arab world to designate oil in dollars.

 

However, this situation of US hegemony is simply going to have to play out. Like a great teacher said “this too shall pass”; some homeowners will lose their house, they will increase the rents! Some bankers, equity brokers, realtors and mortgage brokers are going to become bartenders. Bargirls, please excuse.But, at the end, the underlying strength of the American economy will prevail, just as it always has in the past: through financial crises, war, inflation, recession and depression. (In this we believe – because  we must)
They have so much muscle power that they will prevail; so much of money of the Japanese, Chinese, Taiwanese, Indian, Arab money is in dollars, that we cannot let America fail!!

That doesn’t mean that things aren’t going to get worse before they get better. But as I have said in this column many a times, you shouldn’t have money in the stock market that you need in less than five years, this time maybe ten years.

A long-term investor diversifies beyond traditional stocks. If you are sitting on cash, choose a fund with say 70% in equity and 30% in debt – like HDFC Prudence fund and do an SIP.
If you are a direct equity person, keep 60% in stocks, have 10% in good bond funds – floaters or liquid funds, which may already be up! Have 10% in FMPs. You should have at least 5% in gold etfs, which fluctuates thanks to the dollar! Keep the balance in cash. Your worst enemy right now is not likely to be the market but your emotions. Instincts prompt us to “do something” when we feel threatened or nervous. But strong emotions are often the prelude to bad decision-making.
Firstly, do a reality check; recognize that investing in stocks means your account value is bound to sustain wide fluctuations from time to time.

It’s unrealistic to think that you’re going to earn the superior returns that stocks can give, in a manner as smooth as gaining returns from a PPF account. You have to be aware that the pattern will vary.

I will also guide you to how to automate your investments and invest unemotionally, regardless of how you may feel. It is a simple process called SIP done by ECS and that over a 5, 10 or 20 year period; maybe longer. If you are 22 years of age and expect to live up till the age of 90, you should be having a 68 year time frame!!

 

As Warren Buffett said, “Inactivity strikes us as intelligent behavior.”

In short, it’s one thing to feel fearful about the market; it’s quite another to let that fear trump your well-laid investment plans.

Studies clearly demonstrate that it’s not your store of market knowledge that is most likely to determine your success as an investor; it’s whether you let your emotions dictate your actions or no.
Like Peter Drucker says “It is not your brain, but your stomach that is likely to decide your success in the equity markets”

That’s not a problem in good markets, the test of your resolve is in times like now. It is what you do, not what the market does. So do what you have to do. The market will do what it has to do. Amen.