Year 2008 should be recorded in the world history as the most painful year, considering the calamities in stock market across the globe. We saw, in Jan 08, even the penny stock touched record high and 10 months later, in Oct 08, we can see even the bluest of blue chips hitting record low. Completely immune by series of free falls, there should not be any surprise to the way the market moves; market has seen enough -blackest Monday to blackest Friday.
Is it wise to consider equity investment? Is this an asset class to be avoided completely?
It is vividly clear that the financial tsunami what we see today is the second attack – the first great crash occurred nearly 80 years ago, with the calamitous collapse of wall street in 1929.This terrible financial bloodbath may make us too creepy to spot any buying opportunities thrown up by the big plunge in stock prices.
Instead of reacting to market sentiments, it is wise to follow the theory of two investment legendary - Benjamin Graham, who survived the 1929 crash safe and sound and Warren E. Buffet, one of the world's most successful investors and the largest shareholder and CEO of Berkshire Hathway and a great Philanthropist.
Rule 1 : Master your emotions
Investors who cannot master their emotions are ill-suited to profit from the investment process.
When it comes to equity investment there should not be any room for sentiments, emotions to market moods. Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble...to give way to hope, fear and greed.
Rule 2 : Price Vs. Value of business
Rather than trying to time the market, investors to look exactly at what a company worth and how much it would be worth if worst should come to the worst.
If the company is so cheap that its value stays almost the same even if it were go out of business, then you have a “margin of safety” in your investment.
Rule 3 : Capitalize on Fear
Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now wide spread, gripping even a seasoned investors.
Even though the whole financial world is in a mess, buying stocks of sound companies during this time would be a justifiable choice. These companies will indeed suffer earnings hiccups, as they always have. But definitely these will be a profitable one over a period of time.
Rule 4 : Bad news is an investors’ best friend
When we look at the history, many times the economy was in tank. Despite that market will move higher, perhaps substantially so, well before either sentiment or economy turns up. Indeed, the policies that the government will follow in its efforts to alleviate the current crisis soon the economy will turnaround.
Rule 5 : Invest. Forget. Reap Benefits
If you predict the market how it would be after 1 month or six months from now, then it is as good as slap at yourself. In short, do make long term investment plan – forget about short terms .Also forget about in between ups and downs in market.
Sometimes in life, just following the foot prints will be a wise decision than building ones own strategies, especially when the market is at free fall.
Warm Regards
Narasimhan A R
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