Arohan’s investing life

There are so many cliches that come to mind … blood running through the streets… separating men from boys… catching a falling knife… oversexed guy in a ‘harem’… last one holding the bag… you get the point. The question, though remains, what is a value investor to do?

This is the time when taking a long term perspective helps. This, unfortunately, is also the time when the crystal ball is the foggiest. But let’s give it a try anyways and see what we find. I will ask a few questions which I think are probably foremost in any investors mind today. Many of your answers may differ from mine but hopefully this exercise helps bring some rationality in our thinking. Let me know what conclusions you draw

1. Are we heading towards Great Depression II?

- Maybe or maybe not. Although no two depressions are alike, I do believe that the global markets are more interconnected now than ever before. True that this means that a contagion can spread globally very quickly, but it also means that there are far more investors in the market looking to buy up undervalued assets than ever before. Besides, a depression has to mean that the slowdown in economy is pervasive to all sectors, which hasn’t happened yet. It can still happen but it is also quite possible that the credit markets may start thawing in time to let the other sectors continue to grow, even if it is in spurts, while the housing/financials find their bottom

2. Will the US economic system fail?

- No. The system still remains free and flexible and can survive the ups and downs. In fact, these ups and downs from time to time help in keeping the system healthy over the long term. It helps us find the weak spots in the system and strengthen them

3. Will the Treasury bailout avert an economic crisis? A recession?

- The bailout is aimed at unlocking the credit markets. It does not change the current economic reality. Therefore it is unlikely that a recession can be averted. In fact, I personally believe that we have been in recession in US for the last one year or so. When the credit starts flowing again, it should help the business activity pick up as the businesses start getting credit for working capital and expansion. However, since there is also a lack of ‘Trust’ in the market today, these benefits may be slow to realize. It may be six months to a year before the economic indicators start reflecting an uptick

4. Should I sell all my stocks?

- No!!! The stock market recovery leads an economic recovery and these days the stocks are valued at distressed levels. It is never a good idea to sell stocks low. If you can weather some volatility and are willing to stay invested for a long term, this is a good time to buy stocks. I would however advise any investor to review their portfolio holdings and consider focusing on equities that are most undervalued. This may involve selling some of the other holdings to re-focus.

5. What stocks should I buy?

- This depends on your risk appetite and how long are you willing to hold a position. Personally, my favorite stocks right now are a few select financials and a few asset management stocks with long history of outperformance. I have discussed many of these stocks in the past on this blog

Final thought: It is said that for outsized returns, you need to take outsized risks. However, there are so many businesses selling at such low prices today that buying them carries less risk than ever before. All it requires is some fortitude. I do not think that successful investors take more risk. I believe that successful investors actually have more guts to buy when everyone is in a hurry to get assets off their hands

Related posts:

1. Will US fall into recession this year - or is it already in one
2. Fed trying to break the back of the credit crunch
3. The other side of the recession debate
4. Recession is here! What should an investor do?
5. Global markets decline - is there a value in international diversification?