The great Fall

Hi everyone,

Today is the 24th Jan 2008 and most of us have had a torrid time in the market.

A bad week, a bad month and a bad year - thats 2008 for you.

Most readers would be badly bruised by the fall and must be counting their losses. No words can cheer up someone who has seen his savings go down the drain.

But yet, my message is - cheer up !! Very soon, in fact very, very soon, the market will resume its upward journey and those who lost will probably receover their losses - that's the way the stockmarket functions.

Lets analyze why the Indian stockmarket tanked in the third week of Jan through to this week ;

Firstly it is a fact that the market was overvalued and over bought. Most of the players in the market acknowledged this fact and was, in fact, prepared for the fall. It is surprising that even with hight valuations, even with the sure knowledge that the markets would be on the way down, very few retail players booked their profits. The reason for this is that many retail players are long term and do not book their profits from time to time. This has both good and bad effects. Good because when you book profit on a share, you can sit on the money and wait for a correction to get into the market once more. Bad, because and it goes up, you lose out on the gains. My advice to retail players would be to hold on to the good stocks and book profits on the ones whose fundamentals look shaky.

The second reason for the fall in the market is the "greed and need factor". Indian operators basically play on the greed factor. Thus when the marketis on the way up, they buy recklessly, propelling the index into dizzy heights. At the same time when the cues become negative, they ditch these shares at theslightest hint of a downturn thereby sending the index into a tailspin.

The third reason for the fall is undoubtfully the US market. No matter what we hear from the pundits about decoupling, etc, the fact remains that when the US markets catch a chill, markets all over the world sneeze. More than this, the US economy has, for long been entwined with other economies and any downslide in this will affect these economies. Is is a surprising fact that the economies of most of the countries around the world are dependant on the well being of the US economy. Thus when the US economy is perceived to be sliding, the first effect is on the Dow Jones and the Nasdaq which end lower. The next morning, the Asian markets fall like nine pins and the Sensex and Nifty alson folow the. So much for decoupling!!!

Perhaps the fourth and last factor is the constant booking of profits in emerging markets by the FIIs. FIIs are very nimble on their feet and quickly exit countries, therby driving the markets down. Later they enter these same markets equally nimbly driving these markete through the stratosphere. There is no clear reason why they do this, or whether they gang up and conduct co-operated operations. But the fact is that when the FIIs perceive the valuations to be too high, or Government Regulation to be affecting them adversely, or when they feel global stocks are due for a meltdown, they exit from emrging markets, creating chaos, confusion and neverending pain for the retail investors.


What the retail player player must do :

1. Never have all your savings in the stockmarket. As you age, start shifting your money into more secure areas, so that your risk profile is maintained.

2. Always buy on fundamentals. Before buying a stock, do check the PE ratio, EPS, OPM, Beta, Book value and other fundamentals. If all these are good, decide to buy the stock.

3. Having bought into a fundamentally sound stock, hold on. Never underestimate the power of time. If there is no good reason to sell a stock, dont do it, unless you need the money or you have come upon a better stock and want to switch.

4. Never, ever, sell in panic. There may be many manic mondays and frightening fridays, ride the storm. Always think longterm. Your investment must have a longterm horizon. If you horizon is anything less than six months, you should not be in the market. If you need the money after two or three or four months, please keep the money in the bank, where it will be safe till you need it.

5.When you see the market at a high and valuations getting stretched, it is a good idea to sell a part, sit on the money and wait for the correction. Once you see the correction set in, try to get into stocks which are fundamentally sound and which have been hit hard. These are the ones which will bounce back fastest.

Good Luck, more later.