Posted by: sanjayshetty | October 8, 2008

Attempt to be fearful when others are greedy and to be greedy only when others are fearful

Words from the Oracle of Omaha,

“In fact, in my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now,” he told Charlie Rose in a PBS interview that aired as the Senate voted on a $700 billion bailout package.

On another ocassion he said:
“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Worldwide there seems to be fear in almost every market. We can’t anticipate if this fear will continue or when it will depart. However, we know that fear makes people behave irrationaly, causing them to undervalue almost everything. In the current markets, you could buy a stock and see it tank 20%-40% in a week as the fear increases… make sure you’ve done your analysis well.

Whenever there are great companies available at a discount to their intrinsic value, it’s time to buy. Over time price will definitely catch up with value. This time factor, can be a long time, sometimes years… And if what the fearful are saying that this is a recession of magnitude, then the time could be a long time.

The amount of fear and the problems which the current global markets face are definitely large ones. A friend of mine said a very interesting thing, “it’s certain that the markets are presenting a good buying opportunity, however, there are going to be many opportunities to buy”. The explanation for this is, what is a discount today might be an even greater discount tomorrow. When prices sink they usually go down faster than they come up. So take your time, be extremely choosy, and buy when you get a substantial discount to intrinsic value.

Lastly, nothing is more important than a good “Margin of Safety“, especially since investment is more art than science.

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Responses

  1. […] thought was a bargain slips another 30-40%-50% or even more. (I mentioned about this on my earlier post, where I suggested one takes one’s time before investing, I feel it needs a little more […]

  2. Time to start buying again!

    Searching for direction in the market? This article is for you!

    The fall in the Indian Equity Market is due to systemic global risk that is common to entire market and not specific to Indian Market. This has happened due to financial system instability caused or exacerbated by idiosyncratic events or conditions in financial intermediaries elsewhere (read US and Europe). Now that the growth in these developed economies have tappered greatly, the Emerging Markets will feel only ripple effects, which will however be compensated by domestic demand. Therefore, if both developed and emerging markets have fallen propotionately, the emerging markets, with their relatively higher growth rate, should send buy signals much sooner.

    Out of these Emerging Markets India has reached the point where one can press BUY button and GO LONG. Now, I will elucidate the reasons. Indian GDP rate “may” fall marginally, but it will still remain the second fastest growing major economy. The dollar rise will make exports competitive once again. The negative effects of dollar rise will be adjusted by the falling crude price. As I mentioned earlier, the fall globally has been initiated by the over ambitious finacial players. The Indian finacial system is one of the most robust in the world. The government and RBI have shown commendable speed and sense of responsibility by taking timely monetary and fiscal measures like CRR cut etc. (If sources are to be believed, more are on cards – something like a mini budget). The pay commisssion and loan waiver will further fuel demand.

    I would say, for India, it has been a bear market within a long term bull run (extending till 2040) caused by external factors beyond its control. This is definitely reason for Indian investor to be cheerful and look for buying opportunities, whenever they apear.

    I consider that Indian market is at its bottom or very close to it. At this point I would like to bring in a fact which bring out that India is already over sold. We all know that the US market is close to recession. But legendary investor Warren Buffet has called BUY in the US equities. These are some of his famous words which he uttered on 17th october 2008. “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.But fears regarding the long-term prosperity of the nation’s many sound companies make no sense,” he said. Buffett said major companies would suffer earnings hiccups, but added they “will be setting new profit records five, 10 and 20 years from now.”

    If it is so for the US economy how much more true for an economy which is the emerging growth engine of the world?

    It is time for us to stop looking at global indices for cues and start picking up equities from Indian bourses. The universe of stocks has become large. But I would recommend investors to buy large cap stocks with strong fundamentals. The following are my recommendations:-

    Reliance Industries
    ONGC
    SBI
    Infosys Tech
    L&T
    Reliance Com
    Sail

    Short term investors can look for 20% return (7-15 days). If you can hold it till December, expect close to 40% returns. This level I believe is close to true value. If you hold for 8-12 months, then you are likely to get returns close to 100%

    True value of sensex is close to 14000. I used to talk about growth premium, which India truly deserves. If you consider this then the value is 17000. This level may be achieved in 8-12 months. But I strongly feel that sensex will very soon revert to 12000 levels. There will be very strong resistance at 10000 in downside(similar to the one we had on the upside).

    It is rumored that a US based billionaire investor has heavily initiated long postions. If you (Indian Retail Investors) have not sold your stocks so far, please do not make the mistake of selling them now. If you have cash, start accumulating and building your portfolio in a gradual manner. 3-4 years down the line we may see levels of 30,000.

    Happy Investing Folks! Cheers, finally bottom is in sight!!


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