Deja vu

In January 2008 EMs (emerging markets) saw major correction. Analysts suggested that we are in long term bull markets so no need to panic. It was hinted that the markets will see a new high in Oct-Dec 2008. We are already in Oct 2008 and seeing worst levels of last two years.

I had suggested in my previous posts that it wont be a wise thing to average and i requested you all to be inefficient investors(what i meant was don’t try to grab a falling knife). This was contrary to what you were hearing otherwise and many of you challenged me. I am not using this space to blow my own trumpet but I want to drive the point home that I haven’t forgotten 1987, 1991 or 1999. The bears generally don’t live long compared to bulls and that’s the good part. However at this point keeping the bull on ventilator is dangerous. That will probably give more life to bears. It’s like OCD (obsessive compulsive disorder), you know what you do is not right but you cant stop yourself. When the most optimistic lot in the market will turn the back on the market, there will be a chance to see some bottom formation.

What we are seeing is compulsive buying and abuse of bull’s wisdom even in bear market. Some of my friends call me CNO (Chief no officer) or speed breaker in our close group , but what can I do? I don’t believe in consensus building when it comes to investing my money. There are those who have seen bull and bear markets but are too sensitized by the bulls so they recall only bull phases. What is happening at individual levels is repeated at corporate levels also. Corporate players should respect the cash they have in books. This is the time for them to see competitors fade away and then they can buy them at a distress value. Slower the pace of acquisition the better is the value creation. Don’t rush in. Its not your last supper.

Corporate players have to generate enough cash and remain profitable. Luckily in India we have many companies out there that are sitting on huge cash. If the rumor about the great American dream coming to an end after the elections is true then many companies will be up for sell and at unbelievable valuations.

I have always said that bull markets are driven by cash flows and bear markets by profitability. But we are in love with the names of specific companies and not very much interested in the profitability and PE ratios. Its a dangerous game. Dont buy shares because they are at 52 week low but because the company is profitable to survive in the bear market. That approach will separate men from the boys. I have seen people who advocate change but they themselves remain stubborn. Same is the case with corporate players. We will revisit Darwin and the fittest will survive.

Prior to 1929 US has seen similar events and that led to greatest fall in markets. This time it would probably be more severe as world is flatter than what it was then.

If I have to speak the language of a wise man I would say, "Spot the winners by their real or intrinsic value and not by the perceived value and you shall never lose". Amen!!