Investing in 2009 : Back to Basics

17 Apr, 2009 | by
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All the talk about Recession and now DEPRESSION can make anyone nervous. Wall Street “ Pros “ make their  predictions, and in doing so, create more chaos. This sentiment is probably shared by most folks on the main street.  The market is behaving like a Yo-Yo. To get a perspective, let’s look at the rallies we had in the past week. One wonders, is this a sustainable rally or a one off, I want to feel good BEAR market rally. We are seeing markets rally despite of all the negative NEWS. One might argue that the Market is always FORWARD LOOKING. Which begs the question, is it forward looking or just SPECULATING?  Let us just look at some of the headline stories of March 09, to get a perspective. GE downgraded; Germany’s growth collapsing by a record since world war II; UK and France Industrial output at lowest in over four decades; Jobless rate in the US reaching 10% in at least three states; U.S. household net worth plunging by a record $ 5.1 trillion; Japan’s GDP shrinking by over 12% annually; World Bank is now predicting a negative global growth in 2009. In spite of all these very negative news we saw the markets rallied.

Though, we saw the markets back in the RED again on 27th of March 09 after 5-6 days of consecutive rallies one could argue, what was the basis of this rally? Well may be some “INVESTORS” were expecting the worst and they believed these news were not that BAD after all? The launch of TALF and TARP program also probably helped carry the positive sentiments. The consensus view is that these programs would help but the reality is, we have a lot of UNCERTAINTY about the road ahead and it’s unsafe to give any estimate on the growth and earning prospect of a company against this backdrop of negative news. The economy is still hurting, so surely it will be unwise for someone to assume that the WORST is now behind us. And as to whether we have reached a BOTTOM, well we will have to wait and see.
 
What should we expect in 2009? How is it going to affect the average JOE on the MAIN STREET?
Well, the short answer to that is things LOOK PRETTY BAD but this is not the end of the world as we know it. Yes, there will be changes for sure especially in Wall Street on how its run and regulated. The whole financial system will have to be reconstructed and this is going to take time. So expecting a QUICK turn around is probably ill advised.  People on the main street now understand that the Wall Street “Pros” don’t have the answers but best guesses and assumptions at the best.  The turn-around will happen only when the average folks on the main street feel that things are going to get better for them. Unfortunately, the market has not reached the bottom yet, because the bad news keeps coming. So don’t be surprised by the volatility. We should have a good estimate of the health of the economy after the H1 numbers for 2009 are out. It should tell us how bad the economy is and should also give us a pointer for 2009. It should also tell us if the worst is over or there is more to come.

We are expecting a pretty UGLY Q1 and Q2 of 2009. Navigating our way through this GLOBAL CRISIS is going to be very challenging to say the least. But rest assured that  ” Pros “ will still be tempted to make predictions which will probably create more volatility and make the main street more nervous about the future, but this should not worry the folks on the main street. Listen! Pros don’t have a crystal ball so their prediction is mostly a BEST GUESS. They have made wrong calls. We don’t need to be reminded of that. We have seen respected rating agencies fail and market Guru like Mr Buffet getting it WRONG. 

A lot is ridding on the G20 summit. A global crisis of this magnitude requires a global response. If the leaders of G20 fail to reach an agreement, the health of the world economy will deteriorate rapidly and we may very well slip into in an L Shaped depression with a very long lasting consequence.

So what should we do and who should we trust?
Well, to start with, always look at the bigger picture and the stories behind the numbers, because numbers do not paint the entire picture, so dig deep. Think Long Term. Don’t rely too much on external advise, why not DO IT YOURSELF (DIY). There is an increasing trend among investors willing to do it all by themselves. And why not, the market professionals have not managed to do a better Job anyways. We don’t know if the folks on the main street will keep away from Wall Street in 2009, especially after Bernie Madoff debacle. Wall Street of 2009 will definitely be different as the fear of God has been put in most heavy-weight players who once thought they were invincible. We have seen many hedge-funds and banks going BUST and there will be probably more.

What’s the message for an average “JOE”on the main street?
Well, first and foremost, investing should be based on KEEP IT SIMPLE AND BASIC approach. Invest in what you understand and what makes sense to you and not to an EXECUTIVE on Wall Street. Don’t join the rat-race. Ask yourself a simple question – “Can I live with the risk I am taking?” Think long term.Complicated products are not the answer. In all honesty, no one understands them fully. This does not mean the death of INNOVATION. In fact innovation is good for the market and also for the folks on the Main Street, but innovation should bring simplicity by making things simple to understand, and it does not have to be complicated.

Investors have lost faith in money managers. Going forward the money managers will have to be more accountable and disclose their investment strategy fully. Regulators will need to develop a better understanding of products they are regulating. We have witnessed a “ COLLECTIVE “ failure and there is a lot of blame to go around.

2009 will be the year when we will start going BACK TO BASICS. We will see BANKS go back to what they do best ” BANKING “. The markets will come back at some point and there will be parties again on the streets, but the question is, will this happen again? I am sure it will. After all, we are human beings!

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