Stock Markets have Crashed ..... EXCELLENT NEWS!!

Dear Friends,

As the global markets went into a tailspin two weeks back and continue till writing this mail, comparisons to the financial crisis of 2008 are inevitable. I am getting a large number of calls every day from investors whether it is time to get out of equity markets now – things could get much worse. They say, it is just like the bad old days of September 2008.

Or maybe not! There are two ways one can react to having lived through some great market disasters. Either, you can stay permanently scared, going into a panic every time the conditions resemble the original disaster. Or, as a bona fide survivor of the original, you can be wiser and more confident of facing up to whatever the future can throw at you. It should be self-evident that the worst thing to do now would be to panic. We've had a few weeks of bad news, both domestically as well as globally. It's easy to get influenced by all this talk, especially because of the noise emanating from the investment media. However, you must remember that most of this noise is targeted at short-term traders. If the FIIs are shorting the indices over the next few days or if they are going to pull out cash for a month or so, then it matters to these people.

For long-term investors in equity funds who are investing regularly (either through SIPs or directly), none of this should matter. We need to remind ourselves that things in India are bad only on a relative scale - relative to the rest of the world, relative to what they could have been, even relative to what they should have been. However, in a crisis like this, you need to focus on the absolutes, not the relatives. This is still an economy that's growing faster than much of the world and will continue to do so for a long time. There are plenty of businesses of all sorts that will generate wealth. Our job, as long-term investors, is to make sure that we can reap the rewards by investing steadily for the long term.

You see, the lessons of 2008-09 are absolutely clear. Back in 2008-09, the only investors who lost out were the ones who cashed out or stopped investing when the markets plunged and then stayed away. In the long run, all that happened was that when the buying opportunity was at its best, they were running scared. Eventually, the only winners were the ones who let their SIPs continue, taking advantage of the low NAVs.

In fact, there's one new twist in this tale that makes it all the more important that you don't start running scared. What was witnessed in 2008-09 was a crisis. I suspect that what is setting-in now is not a crisis but a prolonged disease. After all, how many of us expect that the debts of USA will go away soon, or the half-a-dozen sick European economies will get magically cured or that Indian Govt will start focusing on quality infrastructure in a hurry? Thus, as per my reading, it is just a matter of sometime before the markets will realise that this condition is here to stay, take it in its own stride and get on with the business like in pre-last-Thursday days. It should soon be business as usual and all the valuations and the mathematical mumbo-jumbo should adjust to this reality.

If some positive indicators are needed to get you convinced of India's resilience, look no further than what happened in 2008. When US, Europe and Japan went into recession and their GDP actually shrunk, the worst quarter we recorded at that time was a growth of 5.5%. We came down from 9% to 5.5%, but we still grew! And ultimately, we all know that money chases growth. Also thanks to the global growth slowdown fears, commodity prices are crashing - crude is trading around $83 which can only spell good news for the Indian economy, its inflation and therefore the Indian markets. You can also be reasonably sure that we have seen the last of the rate hikes from RBI for some time to come. A peak in interest rates and a hope of gradual reduction will come as welcome relief to corporate and markets. Lastly, there is now a growing chance that the US Fed will announce QE3 (third cache of Quantitative Easing – a euphemism for printing more of green-backs), in a bid to stem the fall in asset prices. That may not be a great move from a long term point of view, but can help put a floor on falling asset prices and give speculators renewed confidence to start bidding up asset prices all over again. This could again postpone the problem - but the West seems to love postponing the problem rather than dealing with it!

As far as I am concerned, I am looking around for some loose cash to buy as many quality Mutual Funds as I can get my hands on over a period of time starting from now. And, of course, not to forget Gold for some more time...