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Investing in fundamentals will shield you from market gyrations

Mumbai,Raghu Palat: The Chinese have a saying, “May you live in interesting times”. They have had their wish more than fulfilled during the last two weeks with a tumultuous Sensex rising one day and falling the next. Even during the span of a single day rising by over 800 points to end in the negative. Of course, August 24 was the worst day when the index slid 1624 points. The issue we need to look at is as an investor what should one do – sell or buy?


First of all, it is important to look at the reasons for these massive fluctuations. A major reason is the devaluation of the Chinese currency. It is argued that this occurred because the Chinese economy is going into depression, and the devaluation is to make its exports more attractive. The US dollar is appreciating against most other currencies and this is placing pressure on both US growth and exports. In addition, there is a fear that oil prices below $40 would push the world over the brink into recession or slower growth.

In all this, India, in spite of the political drama enacted every day, is still fundamentally better placed. Despite the increased government spending, fiscal deficit is under control. With foreign exchange reserves of $ 330 billion, India is in a comfortable position. Inflation is well below the Reserve Bank of India’s target level and the GDP is projected to grow at 7.5%. There is also an argument that the steep fall in the value of the rupee to 66 to a dollar is good as the rupee was overvalued. It is argued that this fall will make exports from India more attractive.
So what should you do?

There is an oft quoted saying, “Buy when there is blood on the streets, even if that blood is your own.” This statement is credited to Nathan Rothschild. When the battle of Waterloo was being fought, there was a real fear in England that the allied forces under the Duke of Wellington would be defeated. The day after the battle the House of Rothschild began to sell heavily – literally all the shares they owned. As Rothschild was known to be a savvy but prudent investor, the market panicked. Everyone began selling all the shares they had and the market crashed. At this time, Rothschild, through multiple agents began buying all the shares they could lay their hands on. It was only later that it was realised that Rothschild had used carrier pigeons. These pigeons were sent from Waterloo by his agents as soon as it was known that Wellington had won the battle. Rothschild knew he was the first to possess the news and he capitalised on this to drive prices down by creating a panic and when the prices were down he picked up the shares for literally a song. He is believed to have made over two million pounds that day – a considerable sum at the time.

I believe India is fundamentally sound and we are unlikely to see a financial meltdown. The fall on August 24 was an aberration and as soon as sentiments settle down, shares will rebound to its earlier heights. The monsoon has not been as bad as it was feared. With the fall in the value of the rupee IT companies will do better in the immediate term and exports will pick up. Markets will fluctuate.

I believe that if you buy shares of fundamentally strong companies, though there would be aberrations, over the long term, you have nothing to fear. I will not recommend intra day trading unless you are strong hearted as the swings are wild. In short. Do not sell. Do not panic. Wait. And if you want invest for the long term. Remember equity has been growing at a compounded annual growth rate of 17% for over 23 years.

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