Do Nothing

By Ramesh Akkineni

Peter Lynch wrote this in 1995 about corrections -

This is where a market calamity is different from a meteorological calamity. Since we've learned to take action to protect ourselves from snowstorms and hurricanes, it's only natural that we would try to prepare ourselves for corrections, even though this is one case where being prepared like a Boy Scout can be ruinous.Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.

The first mistake is hedging the portfolio. Anticipating a drop in the market, the skittish investor begins to dabble in futures and options, the kind of investment that will make a profit when stocks decline. People think of this as correction insurance.It seems cheap at first, but the options expire every couple of months, and if stocks don't go down on schedule, people have to buy more options to renew the policy. Suddenly, investing isn't so simple. Investors can't decide whether they're rooting for stocks to falter, so their insurance will pay off, or for a rally, for the sake of the portfolio.

Hedging is a tricky business even the pros haven't mastered-- otherwise, why have so many hedge funds gone out of business in recent years?Hedge-fund managers have been sighted in unemployment lines.

The second and more prevalent mistake is the ritual known as lightening up. This time, our skittish investors, again fearing the correction is imminent, sell some or all of their stocks and stock mutual funds. Or they put off buying stocks in companies they like and sit on their cash, waiting for the crash. "Better safe than sorry," they tell themselves. "I'll wait for the day of reckoning, when all the suckers who didn't see this coming are wailing and gnashing their teeth, and I'll snap up bargains left and right." (But once the market reaches bottom, the cashsitters are likely to continue to sit on their cash. They're waiting for further declines that never come, and they miss the rebound.)

They may still call themselves long-term investors, but they're not. They've turned themselves into market timers, and unless their timing is very good, the market will run away from them.

Peter Lynch wrote this about Warren Buffett -

Recently, Forbes published its hit parade of the richest people in the world, and I was reminded that there's never been a market timer on the list. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it.

The fact that nobody has done so ought to tell us something about our chances of dodging the drops. Warren Buffett weighs in at No. 2 on the Forbes list. He got there by picking stocks and not by switching in and out of them.

Buffett switched only once in his career, in the late 1960s, when Wall Street fell so hopelessly in love with a select group of growth companies that no price was too high to pay for them.At the point of maximum silliness, McDonald's was selling for 83 times earnings and Disney for 76, whereas in saner times, they might sell for 20 times earnings. These two companies, and 48 others in the so-called Nifty Fifty, were so overvalued that it took them ten years to catch up to their price tags. So if you're looking for more concrete advice than I've offered sofar, take a tip from Warren Buffett and get out of stocks that are selling for 83 times earnings. Otherwise, stay the course and resist the temptation to outsmart corrections.

Popular posts from this blog

It Pays to be a Nervous Wreck

By Ramesh Akkineni
from an article in Livemint Two weeks ago, Microsoft issued the sort of quarterly report usually seen of a company in finest mettle. Redmond’s sales were up 15% and profit double that, excluding certain deferrals. And the rest of the year, it projected, would be just as sanguine—certainly unlike in the economy as a whole. Elsewhere, that would be a mandate for staying the course. In Redmond, though, they were crossing off days on their calendars, waiting until Friday, the first day of February and thus the first opportunity Microsoft would be able to truthfully state, “Okay, Yahoo, it’s been a year since we talked to you guys; where’s the beef?” Microsoft remains obsessed about Google because it reads the same things everyone else does about how Google’s style of free, “in the cloud” computing means the slow and steady decline of Windows and Office. That’s a technical debate, one in which both sides have good arguments. But....
Read more

Korean Model

By Ramesh Akkineni
from an article by Ha-Joon Chang in the Guardian In my lifetime Korea has lived through one of the greatest development miracles – half a century ago, its annual per capita income was around £50, less than half that of Ghana at the time. Today, it stands at £12,000, putting it on a par with Portugal and Slovenia. How was this possible? Korea of course did things that most people agree are important for economic development, such as investment in infrastructure, health and education. But on top of that, it also practised many policies that are now supposed to be bad for economic development: extensive use of selective industrial policy, combining protectionism with export subsidies; tough regulations on foreign direct investment; active, if not particularly extensive, use of state-owned enterprises; lax protection of patents and other intellectual property rights; heavy regulation of both domestic and international finance. The Korean experience shows that sustainabl...
Read more

Wild West

By Ramesh Akkineni
From an article in San Jose Mercury News by John Boudreau Not long ago, Tsoi Chun Bun made potato chips. Now he designs and sells millions of mobile phones a year. He is one of hundreds of young entrepreneurs seeking overnight fortunes in Shenzhen Inc. — the Wild West of the mobile-phone industry. Phones made and designed by these Chinese vendors will account for about a third of the 1.1 billion cell phones that will be sold around the world this year. Three decades ago, Shenzhen was China's first city to experience market-oriented economic reform, unleashing anything-goes capitalism that has spread throughout the nominally capitalist country. And while China's mobile-phone industry has spread beyond Shenzhen, the southern region remains a center of the mobile-phone ecosystem that inspires dreams of instant success. "It is China's version of the Gold Rush," said Shanghai-based Ken Qing Wang, general manager of the China operations of Silicon Valley-based Tele...
Read more