The Paradox of RISK

That investments do carry a risk with them was reiterated by the current market sell off where not only second line stocks but even the so-called ‘bluechips’ or ‘bell weather’ stocks fell like nine pins !

Just ten months back, who would have imagined in their wildest dreams, that India’s most popular stock - Reliance Industries, quoting then at Rs 3000 plus, would be available to investors at near a third of the price – at Rs 1300!. Or, for that matter, even Larsen, the ‘robust’ company known widely to have an order book position full for the next three years would fall to third of its value, from the high of Rs 4500 to the current pre bonus equivalent price of 1600 ( ex bonus price is Rs 800).

Examples galore. Many frontline stocks in the ‘hot’ sector of Real Estate like DLF have seen their prices being eroded by more than 75% ! .

And ask anyone whether they would want to buy these stocks, now that they are available at one-third or one-fourth of their peak values? The most likely answer will be a resounding NO!. Today people feel that the ‘risk’ of investing in stocks is high.

This brings us to the paradox of risk – When the perceived risk is high (like today), the real risk is actually low. Conversely, when the perceived risk is low (like what it was before the Jan 08 fall), the real risk is actually high.

It is this psychology of the crowd that a true investor has to capitalize on and take advantage. These are the extreme cases when contrarians can benefit.

It is a fact also that markets generally react extremely during up trends as well as down trends. Up trends give rise to mass euphoria while down trends provide panics and fear. And the investor who is able to identify such market conditions can benefit hugely from it.

In the current scenario, we are well witnessing the signs of a panic among investors. The media too is adding fuel to fire as headlines scream of the markets hitting new lows and of disappointing pictures of market crashes.

These could well be signals of perceived risk today being high; and therefore the real risk being quite low.

CA Rajiv D Khatlawala
Head of Research - Jhaveri Securities Ltd.