Business - Tamiloviam

 , M.B.A  
.  ,  
  ,    
  .  , 
    ,  
 .   " ."

- 

Stock Market - The long-term view

Jul 23, 2002

The Dow Jones fell by more than 390 points - its 7th largest fall on Friday.
Worldcom filed its bankruptcy - the biggest in the history of the United States
on Sunday. These are the recent developments in a series of Corporate Scandals
involving big names like Enron, Global Crossing etc. It is true that these corporate
scandals are depressing the Market. But are they the cause for the fall of the
market. Or are these crisis precipitated by the fall in the market ? The Dow
Jones Industrial Average has grown by approximately 20% on a Compounded
basis from 1995 to 2000. Is such a growth sustainable over a long period of
time? The answer is a big "No". Every Market has its own cycle of growth
and contraction and the Stock Market is no different. While we had continuous
growth over the last decade what we are currently witnessing is a Contraction
and it is perfectly natural for the markets to behave that way. The market always
keeps moving from one extreme to the other.

I feel amused seeing people who are shocked to see the markets slide. It is part
and parcel of the market. I also feel sad to see people whose savings have
disappeared in this meltdown. The advent of Internet and the tremendous power
it provided in the hands of the investors to work on their investments (or is it
speculation?) has a lot to do with this situation. I am not saying that it is bad.
Any tool that cuts overheads and increases efficiency and transparency is welcome.
But people started believing too early that they are on top of the "S" curve when
it came to coping with this development. The fact that these developments
happened when the markets are going through one of the longest growth cycle
didn't help matters much. People got used to seeing their networth grow instantly
in front of their eyes. They forgot that it is very difficult to defy gravity. If
investors wanted more secure returns they should have put their money in more
secure avenues like Certificate of Deposits. Or they should have diversified their
exposures by investing in several instruments with varying risk and return. They
shouldn't have invested their money fully in the stock market. Risk and return
go together. When people need a higher return they should be willing to take a
higher risk. There is nothing called a "Free Lunch".

Any investment in Stocks should be done after a careful study of the company
and its potential for growth. Purchasing stocks is not like purchasing merchandise,
which we can return and get a refund when it doesnt perform to our expectation.
Unfortunately with stocks there is no provision for getting a refund when people
don't like the performance!. I even wonder whether getting used to returning
goods when we dont like them has anything to do with the impulsive buying
of stocks with out looking at the Companies and their valuations closely!.

The bear markets are not necessarily bad for the investors. It helps in identifying
the good stocks and provides excellent value for the longer term. It separates the
"Men" from the "Boys" and purges a lot of dead wood. The fact that we are
seeing skeletons tumbling out of the corporate closets is proof enough. Companies
which were touted as "Top Performers" are either queuing up to file for Bankruptcy
or under scrutiny. These things wouldn't have had such an impact in a bull market.
The markets would have shrugged them off and gone to the next good news.
Ultimately when the dust settles we will have more companies about which we
can be sure of and whose earnings we can trust better.

Any case there is no reason for the long-term investors to panic now. If someone is
in the market for the longer term and has invested in fundamentally sound stocks
he/she should not worry about the state of the market on a day-to-day basis. Whatever
fall we are currently experiencing is not unusual. In the long run the markets are
here to stay and grow. For the simple reason that the Stock Market is one of the
most efficient systems for the allocation of Capital. We simply don't have a
replacement for them. Of course there is always room for improving the regulatory
mechanisms. The Enrons and Worldcoms are proof enough.

- 'SenthilKumar Narasimhan'