Friday, January 25, 2008

Falling Indian Equity Markets

Warren Buffet once famously said, "Only when the tide goes out do you discover who's been swimming naked". This market correction showed up a lot of people who were swimming naked. i.e, people who were long on stocks or futures with very little knowledge or conviction about the companies they are invested in. For long term investors, a large market correction provides a good time to invest into the market. The market again showed that you can get washed out if you are leveraged. A friend, who started active trading a few months back, was very happily making money before the carnage happened and was telling me about his stock market conquests. I asked him to be careful and he responded saying that he always puts stop losses in place. I still told him to be careful as stop losses does not always do what its meant for. I met him again today and he had lost ALL his capital and is in debt to his broker. So, he now needs to borrow money to pay his broker!!! I asked him what happened to his stop losses. He said they did not work because the stocks were in a downward freeze and there were no buyers. He told me that he wished he had taken my advice to be careful.

Now about the fall in the market, I think there is no reason that the market fell off in the way it did. Looking at the amount of money mutual funds have collected via their NFOs and also the insurance ULIP products that sell the highest in Feb-March period every year, I think there is going to be a significant amount of money that will get invested in the next 2 months for the market to fall off dramatically from here. In fact, without getting into conspiracy theories, the fall may have been orchestrated to enable bigger players to buy into at lower levels with the weaker retail investors panicking and selling off.

So, my suggestion is to buy into companies which you know are doing well and whose business cycle is positive and then wait for the market to move up in the near future. We may be testing new highs sooner than people are expecting.

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