It’s different this time ……..Time will only prove it !!!!

One of the economist said that Stock market has short-term memory. We, at Pentagraph, truly believe in his statement.

Financial media says that it is different this time. It is difficult to come out from this local as well as global mess.

Lets study some past event and compare it with present event with some parameters.

1996-1998

  • Drop in GDP growth by 4 %
  • High Inflation
  • High Interest Rate
  • Sovereign Default – Russia , Mexico
  • Contagion in East Asia
  • Collapse in Financial Institution – LTCM
  • Govt Action ( Pokhran )- Drying out Foreign Capital flow

2008 -2012

  • Drop in GDP growth by 3.5 %
  • High Inflation  – 8 to 10 %
  • High Interest Rate
  • Sovereign Default – Greece , Portugal ( Now Spain is making a news)
  • Contagion in Europe
  • Collapse in Financial Institution – Lehman Brothers , Merrill Lynch etc
  • Govt Inaction – There is actually vast list but mentioning important ones .. Removal of Diesel/LPG subsidiary , FDI participation in Retail / Aviation / Insurance etc .

Investors know the past events and returns delivered by the market post events . But…. short-term memory .

We don’t know when the market recovers , what would be the future returns from market . We don’t  intend to predict anything .

But , We follow the advice given by Invetsor Guru –  Sir John Templeton.

“ Bull markets are born on pessimism ,grow on scepticism , mature on optimism & die on Euphoria”  

Pentagraph believes that we are somewhere between pessimism and scepticism.

 

Do we stop using electricity if get shock?

It’s a human nature to constantly assess risk vs. reward for everything we are involved in. We naturally lead life thinking about advantages of doing something vs. risk or disadvantages of doing the exact same thing. We resolve it in favour of action or inaction purely based on how we come at it.

For instance, we all know that electricity can cause death and hence we take precautions to use it carefully. However, we don’t stop using it. We have no option really.

Another example – Mumbai-Pune expressway routinely makes headlines due to number of mishaps taking place almost every day. We most certainly need to be careful while driving, however, we just don’t stop driving or travelling because the worse outcome is a possibility. We have no option but to be on the move.

There are certain things in out life where we know risk outcome is very much possible outcome. In such cases, our life experience gets applied, we understand the risk, we take precaution however we don’t stop doing or experiencing those very things. We take efforts for achieving positive outcomes.

However, when it comes to investment, we as investors tend to forget the application of this very principle of life. We tend to forget something called “Inflation”, a virus and take a back seat in taking the equity route.

Equity investment is most definitely risky and it will always remain the risky asset class. But all one should know that how to reduce the risk involved. In essence know how to make an investment and what precautions one should take:

To list a few:

–          Do not get into direct equity investment if you lack expertise and you lack time,

–          Do not enter the equity asset class if your investment time horizon is shorter than 5 yrs ( you need to keep a minimum of 5 year for + 1 year for + 1 year for in mind),

–          Consider not overexposing yourself to one stock / one MF / one sector when investing

–          Avoid higher allocation to only equities.

Pentagraph assessment is that inflation will remain at a high level for a considerable period to come and there is no way to work around it. One can beat the inflation by taking the exposure to simple diversified mutual fund. However, investors are scared with the performance seen over last 3 to 5yrs.

We have seen such poor market performance in the past … 1982 – 1984 , 1994- 1999 and again in 2010-2011. All these poor performance periods were followed by good performing periods attributed largely to corrections due to efficiencies seen with deployment of lean operations strategies, but most of the investors missed taking advantage of those good performing periods.  In 2012, we may be looking at another round of good times and this is the time to make the best out of your investment decisions.

Look at the data shared below. Please note that this data is captured over a 30-year period that has seen Wars, Natural Calamities, government toppling, elections, Stock Markets Scams, Terror Strikes and just about anything our country has faced and or is on the cusp of facing in the future.

IS EQUITY STILL A FUTURE BET?

 

GDP

BSE SENSEX

1991-92

Rs 6,54,729 crs

1193

2010-2011

Rs 78,75,627 crs

19445

Growth in   multiples

12 times

16.2 times ( 1.3   times of GDP multiplier of 12 )

2011

$ 1.7 trillion

19500

2020

(Expected GDP as   per CRISIL)

$ 4.6 trillion

???

Expected GDP fig. source: Article in DNA Money on 25th April 2011

Now that qualifies for some return on investment, if you latched on all of the this growth by being a investor who assessed risk and invested.

One has to make a choice whether he/she needs to use the electricity for better life or to stop using it. There is no choice really but to assess the risk and plunge!