Everyone is convinced that the Sensex will touch 5000 very soon, and the last place to be investing now is the equity markets. Of course, many of these people were sure that the equity markets will touch 25000 just about 12 months back.
Times are tough. Too many investment myths have gone unchallenged lately. And we love to believe that tomorrow will be like today. So the best thing to do is relax, and read the classics. Let’s look at the four biggest investment myths circulating right now:
Myth #1: The market will recover in 3 months time!
In case your broker, banker, relationship manager or whosoever's job is dependent on the size of your cheque, tells you that the market will recover in 3 months. He is trying his luck. You would do well to ignore his pleas.
The markets will do well. After all, the index is a slave of earnings and optimism (price-earning ratio!). However, nobody can put a time line to it.
Myth #2: Indian growth rate is poor!
India will continue to grow at a rate of 6.5 per cent; that is a fantastic growth rate. The strengthening of the US dollar is a boon, the falling oil prices is a boon, the falling wages is a boon for the manufacturing and software sectors. So relax.
Remember, the US has a strong ability to innovate and grow, and India will continue to be their important partner. Our balance sheets are not over-leveraged. The equity markets will punish the excesses. Look at Cholamandalam DBS; the share has fallen from Rs 370 to the current price of Rs. 40! Which means our recovery will be faster than the US economy.
Myth #3: The FII money will not come back!
The strengthening of the US dollar makes emerging markets less attractive. However, if The US goes on converting all their coniferous trees into green backs, the US dollar will weaken. Thus at some stage when our earnings move up, and the markets look attractive, the monies will come back.
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The flip side: There are many people who believe that the lag in the FII (Foreign Institutional Investor) investment will be taken up by the mutual funds and the unit linked plan collections. This is good in theory, however, reality may prove to be difficult. As downsizing happens, the first casualty will be the mutual fund SIPs and the life insurance premium. This is a major cause of worry as the Banking, Financial Services and Insurance (BFSI) sector is also a big employer. My take on this is very hazy.
Myth #4: Real estate and equity markets will take decades to recover!
In the 200-year history of equity investing in the United States, stocks have never taken decades to recover. I used the US example because Indian stock market history is not long enough.
However, if there was an index fund available since 1978 (sensex base year), you did an SIP (invested systematically) in it, and re-invested the dividends, you would have got a great return (say 5 per cent real return) over 30 long years. Add compounding to it, and you would be a rich person! Remember, you would have out performed your bank fixed deposit partner by a mile. (The key is regular investment and reinvested dividends, and a low asset management fee.)
The Nikkei 225 in Japan, is down more than 65 per cent from its peak in 1989. Could India be headed for the same long, deflationary spiral? Not likely. The Japanese real estate and equity bubble was much bigger, government action there was clumsy and ineffective, and the banks were knee deep in shit. Indian economy is still growing.
In India the real estate mess is in the capital market, so risk transfer is quick, brutal and immediate. Real estate companies have fallen between 30 to 80 per cent from their peaks.
Also remember the market normally does things in advance, so the battering may have happened ahead of the real market events. So if real estate prices were to fall (say 30 per cent) the shares of real estate may actually go up! Logic being “Oh! After all, the markets have fallen ‘only’ 30 per cent, we had expected 80 per cent.”
So, let’s buck the trend together and look forward to a happy, healthy and prosperous New Year! Happy 2009, and happy investing.
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