Markets - the supreme teacher!!

The US meltdown, triggered by the collapse of Lehman Brothers, and the consequent fall in the world financial markets has had multiple repercussions. However, perhaps this fall may act as a good lesson to investors for the future – presuming they remember it the next time!

The first lesson which investors must learn is, simply, that all investments, whether in bluechips or other stocks, will and do carry a risk. The past four year rally in the world stock markets made investors presume that higher returns came free of cost! It may be important not to forget that any investment carries risk – some have lower risk while some like equities have higher risks.

Secondly, as investors, let us all recognize and accept that what goes up, comes down and consequently what goes down, comes up too. In January this year, not many investors would have been ready for such a sell off and such low prices as we see today. Similarly, a year from now, probably many investors may perhaps realize that the 10000 Sensex level was a good buying opportunity, which should not have been missed!

Thirdly, such sell offs in the stock markets present tempting value picks to investors who have the capacity to hold. As the saying goes “Buy when there is blood on the streets”. Not too far back in time, panics during the post Harshad Mehta Scam and even the post ICE sector meltdown, gave great value picks to investors who had the waiting capacity.

Fourthly, while stock markets the world over have fallen heavily, precious metals like Gold and Silver saw a bullish trend. Even the USD against the Rupee (USDINR) saw a good 20% rise. This suggests that, in future, as investors we need to be more diversified in terms of spreading our portfolio to different asset classes and not just equity.

And the fifth learning for the investor may be to remind himself that this is ‘not the end of the world’. Historically speaking such crashes have occurred from time to time and more importantly, they have acted as a base for a much stronger economic growth in subsequent years.

CA Rajiv D Khatlawala