Beyond the budget.
The budget day is indeed time for some quixotic stuff. The economists think like the citizen and the citizens think like an economist. That reminds one of the apocryphal tale on the most beautiful actress of his time proposing to George Bernard Shaw. Budgets are actually meant for governments to report economic performance to the world. Rating agencies are the key players who wait to downgrade if they think it doesn’t work for them. With the kind of economic performance in play, we must probably forget about the budget and think of what will bring economic performance back. The answer is simple. Investment is the only solution. Gone are the days when governments invested for us to watch. These are times of private investment. We need to open our wallet to invest in our Nation’s future. If not, we will be forced to sell our gold to buy bread someday in the future. And, no one will be ready to buy our land. It will remain `priceless` albeit in a different sense. The good news is that valuations are low and that risk is truly in favor. Market risk is like rough weather. The skies will only get clear after all the noise and thunder.
A hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.
Investors always track market risk while making investment decisions. The over emphasis on market risk keeps investors busy tracking events, news, trading data, price and anything that has a potential to sensationalize their investment. The sensationalism is momentary or at best short lived. After it passes, the markets always return to the fundamentals of the investment. This makes the valuation risk a better investment driver and the investor must learn to focus more on it. The markets have seen a serious flight of capital to defensives during 2012 and we find that the market valuations are distorted by the higher valuations enjoyed by the consumer staples and private banks. Essentially, this distorts the index valuations and makes the markets look more pricey that they actually are. If we remove the overvalued parts and take stock, the valuations look very attractive. When valuations are attractive, the valuation risk is certainly lower. Investors must learn to use the uncertainty created by market risk to lower their valuation risk. In short, buying cheap is the best way to keep your investment risks low. When cheap gets cheaper, the valuation risk becomes lower. Investors must ensure that the investment fundamentals do not deteriorate when valuations drop. If they remain stable, the markets will be only more investment worthy when valuations drop.
Now that the economist has had his day, it is the investor’s turn.