One of Warren Buffets’s most famous quotes is “Be fearful when others are greedy and be greedy when others are fearful”. There is no better time to apply this time-tested investment philosophy than the present.
Opportunities like the present once come very rarely.
Almost every day brings in a new piece of bad news – the sub prime crises, corporations writing off billions of dollars, the strengthening rupee wiping out the profits of Indian corporates, inflation touching new heights and a slow down in growth.
A dooms day scenario!
Every analyst worth his salt is busy predicting the new low levels that the sensex will sink to. It is another thing that the same analyst was three months ago breathlessly proclaiming that the sensex would soar to new heights.
One is again reminded of the sage words of Warren Buffett “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.”
There is so much fear and apathy in the markets at the market that quality stocks – companies with a proven track record and a robust business model – are quoting at a steep discount to the values they were commanding only a few months ago.
Things will change
The beauty of the stock markets is that things can change imperceptibly. The markets always react in an exaggerated manner. Most (probably not all) of the bad news is factored in the present pricing. The market expects the bad news to keep flowing in so nervous investors have already depressed prices in anticipation.
What happens when the bad news stops flowing on a regular basis? What happens when good news starts trickling in? Sub-prime crises in control, inflation at tolerable levels, economy getting back on track. Surely even the most pessimistic of analysts believes that this will happen sooner or later.
When that day comes (and it will come imperceptibly) investors will slowly but steadily start regaining their confidence and flock back to the markets. When that happens, the prices will start to harden of those stocks that you would have purchased today at depressed prices.
Keep the perspective
It is important to keep things in perspective. The alternatives to investing in the stock markets are limited. Gold is over-heated, real estate is expected to go into the doldrums and fixed deposits don’t offer more than 8% per annum. If one can make 15 to 20% on a year-to-year basis from the stock market, one should consider himself better-off.
Stop looking for the bottom
Looking for the bottom? You’ll never find it. Instead there’s a real risk that in adopting a pacifist wait-and-watch approach, several investment opportunities may pass you by.
Volatility can be one’s friend if handled sensibly. Take advantage of every dip in prices to buy another small quantity of shares. If you have a corpus of Rs. 1,00,000, invest 10 to 15% of that on each occasion when the market tanks to buy your choicest scripts. This way you will have a nice low average price.