Recommended Strategy
On Monday, October 27, 2008 13:49 by Sudip BandyopadhyayBenjamin Graham suggested during the worst days of 1930 that Investors should look at “Value Investing” rather than attempt to time the market. Investors should look at what exactly the company is worth and how much it would be worth in the worst case scenario. One has to look at the Company’s assets, liability and its ability to produce cash. If the company is so cheap that its value would scarcely to be less if it were to go out of business. This is referred to as the Margin of Safety. Thus, if a company looks cheap compared to the referred conservative forecast, it would be worth investing in this crisis and create a asymmetric bet. If the market has mis-priced the company, the investor will make lot of money.
The similarities are striking visible. We should not try to work out how long the market will take to recover or when it will hit the bottom – that task is impossible. We should use basic balance sheet method to work out how much a stock is worth and how much it would be worth in the worst case scenario. If that calculation leads us with a Margin of Safety, we should buy it.
Rahul says:
October 27th, 2008 at 3:10 pm
Hi Sudip! Have been buying and averaging my buy price on each fall… But the market seems to behave extremely abnormal….. Fundamentally strong scrips are just tanking day by day….. What is ur view on the future for small investors like me. Should I stay put or still buy on the markets falling? Regds…. RS
Sudip Bandyopadhyay says:
October 31st, 2008 at 1:07 pm
Hello Rahul
A person who purchased the German index fund in 1933 – when Hitler came to power — had outperformed the corresponding bond investor by 1955, even though the devastation of the Second World War took place from 1939 to 1945. Equities fluctuate from day to day, but deliver the highest returns over long time horizons. The almost impossibly pessimistic scenario about a downturn in India probably involves 6-7% GDP growth for at most two to three years. Even in that case, nominal GDP growth will be roughly 15%. The corporate sector will then register 15-20% sales growth. This will be slow when compared with the torrid pace of recent years. But it will also not be like the worst fears being expressed today. The most important thing that investors need to be is to not panic. Equity investment has always been a sensible proposition keeping the long-term in mind.
In a recent article in the New York Times, Warren Buffet suggested it was the time to buy equities despite uncertain times ahead. In the summer of 1932, he pointed out, stocks started rising long before economic activity picked up. In truth, equities almost always lead the economy out of recession.