June 30, 2013

Its panic time – time to make some money

Let’s see what all has gone wrong and may get even worse

-          Rupee has depreciated to 60/ dollar and may drop further
-          The drop in rupee is causing imports to become more expensive, which is keeping the inflation high.
-          High inflation is causing the RBI to keep interest rates high, which in turn is depressing growth rates
-          High current account deficit is causing the rupee depreciate and can also result in a balance of payment crisis (similar to 1991)
-          The government is running huge fiscal deficit which crowds out private investment. In addition, it does not have the same ammunition as 2008 to counter any slowdown
-          Corruption and governance issues remain and there is no will to change it in the future.
 
Have I missed anything negative? It is actually a surprise that markets have not dropped further. Actually, let me take that back.

The midcap and small cap index has dropped by 15% and 22% respectively and large caps have not dropped as much, because FIIs have been pumping money (which has now started reversing). So we could have another crisis if the FIIs, were to sell even more in response to the falling rupee.

I think most of you know all this and need not be reminded about it.

Panics are always around
 
Lets look at a graph



This look like the index from 2008 to 2009 …right ?
No, this is the market drop from Feb 2000 to May 2003. The market dropped 38% during this period, with IT stocks dropping even more.

 My point is that market drops happen from time to time and is the risk of earning high returns. The mistake most investors commit is to extrapolate recent events into the future. An investor looking at the market in 2003 would have missed one of the biggest rallies from 2003 to 2008.
The converse also holds true – something which has done well in the recent past, can go down too.

The above graph is not of a stock, but of the favorite investment option of Indians – Gold. Very few would have imaged gold dropping by 20% in 6 months.
 
Panic is a great time to buy
If you have studied history and can keep a cool head, then panics are a great time to buy. The pre-requisite is that one should have done his or her homework in advance, and is ready to act when panic strikes and drives prices down.
 
Let me show you a recent mini panic in 2011 – In financials. The market became concerned about the asset quality (rightly so) and knocked down prices of companies by almost 30% in a span of 2 months
A person buying during the panic would be up by around 50% since then.

Where is the panic now ?
I think we are in the panic territory in small caps and almost getting there is mid caps. If FIIs start pulling out, we may see a full blown crash across the market including the large caps.
Do I know if that is going to happen ? No I don’t. I do know that prices are getting cheap and it will soon be shopping time.  I may even buy gold if it drops another 20% !!!!

----------------
 Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

13 comments:

Anonymous said...

Are there any ETFs that track CNX Smallcap index ? What are good ETFs I can use if I want to get in the market for smallcap and midcap ?

anurag said...

Hi Rohit,

Excellent post,on greed and fear play.Yes Many small cap and midcap are at very good valuations,but we have to also understand that many will not make it,many will perish on loaded balance sheet.

Regards
Anurag

Annapurna Shastri said...

Nice article. The concept of buy low and sell high is well understood by many of us, but we do not practice it. The hope that the markets will fall lower than this prevents us from buying when the valuations are low, and the greed that we might make even better returns during a secular bull run prevents us from selling high.

Lucky said...

Agree with Annapurna. It's really difficult to buy a stock which has dropped 15% in 2 days. One thinks it might go lower and more often than not, it does not. Same goes in the reverse direction.

It is better to stick to a fixed debt/equity ratio formula based on e.g. Sensex PE. But this also is difficult to follow at all the times.

It's more of character than intelligence that makes a successful investor.

@ Rohit: how much cash should one hold in these conditions? Too much and you will regret a reboud, too little and you will regret a drop.

Lucky said...

"I may even buy gold if it drops another 20% !!!!"

Interesting observation. Are you sure about buying? And about 20%?

:-)

Anonymous said...

Good post Rohit.

You will never buy Gold, knowing you.:-) I can bet my farm (my only asset) on it.

Vikas

Rohit Chauhan said...

Hi anon
sorry ...i have not looked into any midcap ETFs

hi anurag
true and thats where the stock selection comes in. at the same time, the overall economy is so bad, that any company doing ok should be strong enough to survive

rgds
rohit

Rohit Chauhan said...

hi annapurna
thats true ..instead of timing, if we find something cheap, makes sense to buy now instead of guessing about the future

rgds
rohit

Rohit Chauhan said...

hi lucky
instead of trying to figure precise times to buy based on PE or something else, is it not easier to buy when the price is good and you have cash

on % cash, its a question on whether you want to avoid the downside or miss the upside. i usually dont keep too much cash in hope that the market will drop. i base my decision based on what i see and if the price is good, i just go ahead and buy it

rgds
rohit

Rohit Chauhan said...

hi lucky
i was joking ..no plans to buy gold. i prefer equities as i understand them better than gold

rgds
rohit

Rohit Chauhan said...

hi vikas
you got it :) i wont buy gold as investment though my wife bought some jewelry and that was a painful enough episode for me :)

rgds
rohit

Nirvana said...

Hi Rahul
Keep posting, interestingly two of your ideas are already with me so its good to have someone who is thinking like me (infinite and HGSL) lets see how future holds for them

Deepak S. said...

Excellent post. I have started on value investing for the last year and it does take a lot of guts to hold on/put in money when the tide is against you. Nice to see there are others who are doing this and have been doing so for a long time.