08 October 2008

Manage the risk…

Current financial meltdown across the globe has been an eye-opener for lot of people. A very strong looking rally has suddenly changed to a bearish trend. Although, it was expected but the impact is beyond any one's imagination.
Big I bankers have either become Bankrupt or are looking for help from the Govt. The ripple effect has gripped Indian market as well. Our financial sector is very much secluded and with quality of credit far better than that of our US counterpart. Still it has impacted not only the Fin sector but reality and manufacturing sectors are feeling the heat.
Till now majority of us have been focusing more on the micro economic factors while investment in the share market. Assuming Indian economy is doing well, if the company has a good management and the sector is performing well, people were ready to put in the money in those stocks. But the current meltdown has changed everything. All the sectors have got impacted. Share prices of most of the scrip have reached near 52 week low mark.

How to survive in such situation
1. It is always advisable to put your money in quality stocks. The prices will crash even for these shares but the recovery will be fast. These companies will try to get the maximum out of the slowing down economy. They will focus on streamlining their process during this phase. Some buyouts might happen as they will get some good companies readily available in the market at throwaway valuation.
Once the economy revives, these companies will lead the pack by giving good returns to the shareholders.
Reliance capital made an announcement to foray into Investment banking and Housing finance on the very next day of Lehman’s bankruptcy. Some might feel that is this the right time for them to make this announcement. Well I feel yes because Interest rates have already reached the peak. In coming few months things should improve and rates will fall leading to a rise in credit off take. As far as I-banking is concerned, the key to success is how well connected you are with the prospective clients. It’s all about relationship which guarantees some good opportunities and hence good business. Timing would not have been better when best of the brains of these distressed companies are looking for new avenues. Reliance Capital will get these top quality people who in turn can help a big bang launch of I banking business.

2. Averaging is a good tool to minimize your losses and increases the probability of faster breakeven. But the only concern is we are not sure when the stock price will bottom out. At times you average out assuming market has already bottomed but the very next day it falls again. It’s better to do it in phased manner based on your risk appetite and how much disposable income you have. There is no full proof way to beat the market but managing the same may be helpful.

3. Commodities can be another option to look into. The nature of the collapse in US is entirely driven by consumer spending. The main beneficiary of the situation is China and the Middle East countries. The appetite for taking huge loans on the part of US consumers driven by very high spending on household needs accounted this downfall.

In the last 9 recessions since 1950, S & P 500 index rose by 30% in the first 12 months once the market reached bottom. Surprisingly in 8 of the 9 recoveries the market reached bottom before the end of the recession.

Whenever such great correction, collapse, recession, war, terrorism, any other natural calamities etc happens …people at large go back to basic which is the old theory. They either keep the money in cash in the locker or they invest in Gold. Gold is one commodity which trades like money and the exchange/liquidity is also very high. Historical events show that Gold is very good long term investment and it has beaten the Inflation number in the last 50 years of history in India atleast.

Price of Gold was Rs. 200 per ten grams in 1968. Today in 2008 the price for the same 10 grams has reached to Rs. 12500 which is 62 times higher than the 1968 price.

Happy Investing!!!