Investors need to overcome fear factor

Ever been on a roller coaster? It’s scary to even see it tumbling down from a height, scarier still to be in it. Most people scream, close their eyes tightly shut, with hands tightly clenched over the support beams till their knuckles are white. Some pray and even wonder at their own wisdom of taking a roller coaster ride.

At the end of it, when it comes to a stop, most agree that it was one hell of an exhilarating ride that they had ever experienced. Similar is a stock market. In the middle of the ride, you’ll find lots of faces drained of their life blood—people who seem to be cursing their luck and the guy who had asked them to invest in the stock market. There are others who are throwing up, many who are crying and some who seem to be enjoying it.

If you were to talk to such people from the investment community, you’ll know that they are worried about the turmoil, but have chosen to keep their faith in the markets. They are in it for the long-term. They have chosen investments carefully and are not bothered about the turmoil that is shaking the world at the very foundations.

fearIf there is one person who deserves a prize for sheer guts, it has to be American investor Warren Buffett. He has infused $5 billion into Goldman Sachs and another $3 billion to GE in the past 15 days. It’s not charity either.

Buffett is acknowledged as one of the savviest investors of our time, maybe of all times. He sniffed out a fabulous bargain. He got preferred stock from these companies that pay him a dividend of 10%, with the option of investing in the common stock to the same extent, within five years at a predetermined price.

It’s a win-win deal he has brokered for it is a vote of confidence on the company. Coming from Buffett, it’s like an investment grade rating or better than that as he is actually putting the money compared to rating agencies’ grades. That’s a good deal, isn’t it? Is there no risk at all here for Buffett?

Of course, there is. These companies are still vulnerable. That is the reason they required the cash infusion in the first place. But with Buffett’s backing , they will have access to more funds and have a shot at becoming healthy again. The price that these companies paid was the fat dividend that they had to fork out—a small price to pay if the alternative was to go belly up.

There are others who are scouring the wreckage of the financial markets to get juicy, valuable chunks. There are many bargains available at this point. But the average investor is so scared that he can see only darkness. The treasures are not visible to him. Savvy individuals invest in such turbulent periods as it presents them an opportunity to make extraordinary profits.

It’s not luck which is on their side. They go in search of luck, meet it in the form of opportunities and take intelligent and calculated risks. Without risks, extraordinary returns are not possible. The risk now may actually be lower than when the stock market was at a high, as the chance of the market correcting was more when the index cruised higher and higher.

But investors were more than willing to come in then. Now, when it’s at 50% of the peak, investors have deserted it. The logic being it may go down. Markets could go down from any point. Higher the point, more are the potential chances. Knowing this, does it not make sense coming in strongly at this point and buy aggressively?

Like Tata Consultancy Services (TCS), which bought Citigroup Global Services and also got with it an outsourcing deal of $2.5 billion over a nineand-half year period. Each one can become a savvy investor at this point in time. You don’t have to be a Warren Buffett and buy up companies.

One just needs to pick up small quantities of shares of fundamentally strong companies now and wait for the market to turn. Most investors are acting like the poor dad from Robert Kiyosaki’s book “Rich dad, poor dad”. They are afraid of risks, assailed by fear and ignorance, and don’t have the foresight to take advantage of opportunities and lack the sagacity to take failure in their stride as a learning experience.

Investors need to see this whole turmoil in proper perspective. This is something that started in the US and there is little exposure that we have. There is “collateral damage”, of course. Foreign entities are pulling out from the world-over to cover their losses.

Also, they are ironically pulling out from countries like India as the emerging markets are seen as “more risky”, the problem started and has engulfed the advanced economies, principally! India happens to be a domestically driven, investment-led economy.

This augurs well for us. We could continue to grow as long as we the investors have faith in our own economy. We don’t need an outsider to tell us that there is tremendous growth potential in India, irrespective of what is happening elsewhere. Just see the state of infrastructure and you will know there are opportunities aplenty. We need to conquer the fear and invest now to get an asymmetrically high return in future for this effort.

Fear can be looked as a positive factor too. The saying in a soft drink advertisement is: “we are of course afraid. But we will do it… Because Darr ke aage jeet”. You need not swill any sugar water. Take the darr ke aage jeet line to your heart and just do it!

(Suresh Sadagopan is Chief Financial Planner, Ladder 7 Financial Advisories)