Saturday, June 21, 2008


So, finally the dreaded inflation number has crossed double digits. Not barely crossed it, but has done so by a considerable margin. Stock markets have expectedly crashed and analysts are screaming "the sky is falling". So what do you as an investor do now? It actually depends upon your timeframe for investment and your reasons for investing in stocks. If your goals are long term in nature such as planning for retirement or children' education, it makes little difference to you how the Sensex reacted today.

Just forget about the markets for a while. Sit back and take stock of the situation. OK, inflation is at 11 %. Did it jump from 6 % to 11 % overnight? No, it took about 6 months to do so. If inflation was increasing continuously for months and the trend is now continuing there is nothing strange about it. What is it that is so sacrosanct about the double digit inflation figure? I cannot believe that inflation at 9.9 % is OK, but at 10.1 % it is going to wreak havoc on the economy. I am not trying to make a case that inflation is good or that it will not affect the economy. What I am saying is that inflation is a fact and that the markets have already fallen by more than 30% from their peaks, simply discounts that fact.

Can markets fall further? Maybe. Will markets eventually rally? Certainly. Take a look at the positives. Since, even the worst case scenario for the economy paints GDP growth at 7 %, I see no reason to believe that we are in a recession. If the markets can consolidate at current levels, waiting for inflation to come down and interest rates to stabilize it may not be such a bad thing for investors. By now the froth is out of the system, speculative positions are low, IPO' are dead, the panwalla is no longer talking stocks. If you have cash waiting on the sidelines, the time to invest a portion of it has come. You could invest 25 % of your cash in high quality businesses, using this window of opportunity. There are plenty of opportunities available, where outstanding businesses are quoting at reasonable valuations. Even if you do not invest, it would be a mistake to panic and sell out now.

Advance tax numbers point to a significant growth in corporate taxes. This cannot happen without profits rising. Again the investments in capacity creation that India Inc. has made in the past few years are about to yield results as this capacity goes on stream. Again it is expected that inflation would come down somewhat as new farm yields hit the markets. I am in no way trying to make out that all is hunky dory with the economy. But it is not a doomsday scenario as many would have us believe. I am simply trying to bring a sense of sanity to the all round fear factor prevalent in the markets. Luckily the crash happened on a Friday. We have 2 days to put things in the proper perspective and then decide our course of action. An old wall street saying comes to mind " Buy when there is blood on the streets, even if it is yours".


Uma said...

Mahendra, there was an interview on MoneyControl website where an analyst said we're yet to have somebody like, say, Tata coming in and saying that the going is tough...At first I thought, he is saying that industrial growth is intact so why worry?? But later he changed track and seemed to imply that those type of confessions will come in and things will get worse.

Mahendra Naik said...

You see Uma, this is precisely the kind of loose talk that I hate. How does this analyst know what industry heads will say 3-6 months down the line. He is simply guessing. I am not saying that markets will rally from here on , they may well fall, but when the buying opportunity comes, its not going to announce itself. Todays TOI gives an article by Swaminathan Iyer, editor of Eco Times and a far more respectable figure than these analysts, calling for oil at $100 within 6 months. So which one do we believe? My point is that it would be a mistake for longer term investors to throw in the towel and sell off at this juncture. I know this is not the popular view and I could be wrong in my assessment, but I am holding on to my long term portfolio.

Ninad Kunder said...

Hi Mahendra

In my opinion we are entering a buying zone now and time to build the portfolio on a long term basis.

I get humoured by financial experts suffesting routing of money into FD's and debt funds now. The same guys were falling over each other to recommend equity funds at 21000.


Rohit Chauhan said...

I may sound arrogant on this, but why should one listen to analysts ? do they know the future better than anyone else.
tossing a coin is a better option if you want to predict will be 50% correct atleast. analysts have a lesser accuracy.
if you understand a company well and valuation is good, then slow downs are a part of the business cycle and such times can be used to invest.
personally, if i want to be entertained i would watch a movie or some cartoons, than cnbc where some moron is confidently predicting the next 6 months.


Mahendra Naik said...

Hi Ninad,

I could'nt agree with you more. I have myself bought Infosys today with the view that in the worst case I could be stuck with India' best company which will give me better returns at the end of 2 years, than a dumb FD. In a better case scenario Q1 resuls expected around 10th July could be a trigger for short term gains.

Anonymous said...

Hi Rohit,

No, you don't sound arrogant, you make perfect sense. I am outraged by how these people play with investors emotions when they try to go with the popular mood and further stoke the fire instead of calming things down, both on the downside and up.