Go out there and BUY !!

I have never claimed to be a master of the stock market. I do my little bit and keep in touch with whats happening around though.

Over the last year or so, markets all over the globe have been battered down. Blue chips have also been beaten down to the extent of 70-80% from their peaks. While there are some pointers to justify a fall, there is absolutely nothing to justify this kind of a fall. Agreed there is a liquidity crunch, manufacturing has slowed, demand has slowed, jobs are being lost, etc. However, there is a silver lining in all this.

The crux of the problem, the US banking system, has learnt a bitter lesson they would never forget. They are being over cautious presently, which is understandable. One must understand that they are banks and they MUST lend to make money. The federal banks across the world have taken bold steps and injected big money into the system. This will ease concerns of banks which will sooner or later result in money flowing into the hands of the genuine borrowers, which to a large extent are corporates. Most companies, have put on hold or shelved expansion plans due to the volatile environment. With availability of credit back many would take advantage and resume their plans, if not to the extent earlier planned. This directly creates jobs, which ignites spending and gets the growth of economies going.

Coming back to stocks, there is a difference between a broken down stock of a broken down company and a broken down stock of a good company. Stocks are just a value that an investor is willing to pay for a portion of a company. As indicated on my earlier blog, stock prices quote many a time at irrational levels, not reflecting their fundamentals. We, in India got a glimpse of extreme greed in January when the sensex touched the 21000 level. Over the last 11 months, this extreme greed turned into extreme panic. A classic Warren Buffett scenario. Not surprisingly, the Oracle of Omaha went and picked up a chunk of Goldman Sachs. Indian stocks are overly dependant on foreign institutional investors. Unfortunately, owing to the collapse of their respective institutions in their home markets, these institutions were forced to sell left right and centre to get cash. At the receiving end were stocks of great companies.

We all know, the Indian story is still on. While the world worries about recession, India is expected to grow between 6.5% (most pessimistic opinion) and 8.00% (most optimistic opinion). This is the sort of growth that investors go after. When the dust settles and people start acting rationally India will be one of the biggest benefactors. India, unlike any other major economy, has several things going for it. Being a major importer of commodities, declining prices results in huge savings. Strong domestic demand and lesser dependence on exports augers well in the recessionary atmosphere abroad.

Stocks are trading at historically low levels. This means lowest price to earnings ratios (PE) are the lowest in years. This is the time for those who do not have much of an exposure to enter for a long run. At these levels the risk-reward scale tilts fully in favour.

The storm has settled. It is time to rebuild !