Investor’s dilemma: The fear returns

Hi everyone,

Here I am again with the second edition of my writings & rather than discussing about different investment options to maximize returns & portfolio management, I will be talking about the drastic swing of the financial markets across the globe.

This downturn of global markets which is actually a high voltage drama across the globe, pulled me so badly that I was actually forced to pick it up for discussion, whatever we were suppose to discuss here, we will surely be discussing in next edition.

Everyone was eagerly waiting for the Monday (9^th Aug’2011) post that remarkable Friday when world famous credit rating agency Standard & Poor’s controversially downgraded the long term credit worthiness of USA from AAA to AA+ after almost 95 yrs of its maintenance at AAA levels.

Most of us were smart enough to understand that this news definitely is not good news for financial markets across the globe, let’s get slightly deeper & try to understand the terminologies behind it.

The rating scale which is currently being followed has AAA as the best rating & on this scale, the ratings go down to AA+, AA, AA-, A+ & so on till D, the worst of all. Down slide on this scale means that the risk associated with the investment in that country’s debt has increased, which may result in the withdrawal of existing investors while future ones might prefer to invest with countries having the best rating. This motion of investors can be a huge & one of the important reasons for economic breakdown, as we all are aware of the fact that markets are sentiment driven & a small bunch of restless investors can create a bigger panic which actually spreads at the speed of light, after all its money matters.

We all know that governments are last to default because of the supreme powers they possess like, they can raise capital by increasing existing tax rates & by imposing new taxes, they have the power to control money supply. Having said that, it looks as if governments can never default, but past has a lot of things hidden in it, countries like Russia, Argentina, Ireland, Greece and Mexico are some of them who have defaulted. According to me it will be too early to say that USA will default, keeping in mind that 2 other prestigious credit rating agencies Fitch & Moody’s have kept the AAA rating of USA intact.

Now a big question arises, what should a retail investor like you & I should do in these tough times?

Post that statement from S&P financial markets across the globe are thrashed, but if we compare the global downfall with our markets, we had a lower impact. Our honorable ministers always keep on saying that Indian economy has a very strong base & these global factors are not going to affect us, but the viewpoints of market experts are totally different, according to them rather than talking our ministers actually need to sit & think about the challenges these tumbling economies can bring to ours.

We all know that no economy can survive on its own, each & every country’s economic development in one way or the other, directly or indirectly depends on other countries’ economies, like the exporters of our country exports to almost all big countries thereby contributing to theirs’ as well as ours’ economies, IT sector of our country which has some of the best companies across the globe are doing a lots of work for their foreign clients who are based across the length & breadth of the globe.

Coming back to retail investment, there is a golden thumb rule to extract good returns from the capital markets is, “Stay invested for a longer tenure“.

Generally the very first thing which is of prime importance while investing in secondary markets is the ‘Due diligence’ of the stock you are investing in, for e.g. potential of the company you want to invest in, one very important point to look at is the progression in profits & market capitalization of the company in last 4 quarters, try to get the insight of the upcoming plans & measures the management of the organization will adopt to meet the set profit figures.

For those who are yet to invest, when bear is stronger than bull & the market is going down, it is not advisable to invest, but one should always remember a very old stock market saying, “Bulls & bears all make money, only pigs get slaughtered”. These are the days when you get the market heavyweights at cheap dirt prices.

The statement above is self explanatory that if invested with presence of mind & patience one can make money in bearish market as well. Always remember one thing, “Patience is the key to success in markets”.

Those who have eroded their capital due to falls in market have two options, wither they can wait for the markets to bounce back (have patience), or they can release some of their holdings to purchase the securities again at lower prices to reduce their losses.

Apart from investing directly in stocks there are other investment options as well in the market which have the flavor of equity but are less risky than shares which we will discuss in our next edition & will try to cover more investment options as well.

Till then all the best & happy hunting the bulls & bears, for any query or help please feel free to contact me at amit.kakkar25@gmail.com