The reincarnation

Dear all,
Its been a long time since I wrote about finance, that many of you may have actually forgotten about me.
Two major events have taken place since I last wrote, I moved in to another country and secondly the world has entered the worst depression since 1929.

In these grave times, as we are led to believe, I should not be loquacious and talk about myself, but comment on something I am really passionate about. I intend to make the common investor aware of the happenings in the financial world through a series a write-ups and how to deal with the recession.

The eternal question which everyone keeps asking is that is investing in the stocks equivalent to gambling. The answer is a yes and no. For the uninitiated, the answer is yes. It is also true that around 80% of the people loose money in the markets. So then why should one invest? Why dont we just put all our money in the banks and accept their measely returns under the pretext of security. Other options which people consider especially in Australia is to invest in property and buying houses or like most indians, buy Gold.

It has been a proven fact from the past that Gold is a favorite commodity to buy when the stocks are going down and recession loops large. But then, has anyone wondered that Indians buy gold under all circumstances and never sell? Its an investment which is passed on from generations to generations. If you compare a 20 year chart of stocks v/s gold, I think stocks would win.

Investing in real estate has been another favorite amongst the rich and the famous. The common man thought that it was the best way to make money. The banks and investment houses also helped to spread the myth. The outcome of this relentless onslaught of greed and poor information was the real estate prices kept zooming upwards leading to a big bubble. The only difference between the rich and the common man is that rich actually have the money and the common man is funded by the bank and he has to pay a chuck of his salary as interest.
I have seen people boast about the number of houses that they own. The forget to mention the debt component in their lives.

The outcome of this greed has been the dramatic burst of the real estate bubble. It has created a massive dent in our financial structure and has led to loss of millions of jobs and money worth nearly 1 trillion dollars and counting.

The effect of this bubble has been devastating on the stocks. Benchmark indexes have fallen over 50% and are trading at 4-5 year low. People have lost lot of money and the day traders have become bankrupt.

The confidence of the long term investor has been battered and bruised. So in the midst of this self created crisis, should the smart investor quit?

For the smart investor, this could not have been a better time to buy into the stocks. So many good companies are trading at P/E of 5-6. Do you think that the stock market will go to 0?
Markets are ruled by greed and fear. The smart investor needs to sense both these emotions and act to the contrary. We are in the midst of a massive fear factor and there could not be a better time to buy into the markets for the long term

For example, last week, Satyam Consultancy Services, one of the finest IT companies in India have a cash balance of around 1.2 billion dollars decided to use that money to diversify into infrastructure by buying into the company owned by the promoters. It was an eg of bad corporate governance and was rightly punised by the markets. 50% of the market value of Satyam was wiped off in a day. The promoters under huge pressure from the investors, called of the deal immediately. The stock was still down. Its market cap was 2 billion dollars. The company has 1.2 billion dollars in hand. It earns around 300-400 million dollars per year profits.

You dont have to be a rocket scientist to estimate that the company is worth buying into. There are issues about corporate governance for sure and i am sure the image of the company has been shattered. But then, these very chimps who are crying about corporate governance are responsible for the bubble which has burst.

If we come out of the recession soon, these very chimps will be crying out loud to buy the stock. Only then, it would have been much more expensive then it is now. This is a classical example of fear running deep into the markets.

So thats what has been happening currently in the financial world- Fear. In the next few write ups, I will try and explain in lucid language as to what exactly led to the bubble creation. Also depending on availibity of time, I would give some stock recomendations

Happy investing!
Kunal