The contagion effect and you.
What we have seen in the past few weeks is a contagion effect due to Europe’s crisis. Nations seem to be headed for default and the market believes these Nations may well be allowed to fail. But, how many times in history have we seen Nations fail? When their fortunes are intertwined with each other, Nations are often forced to bailout each other when in trouble. Typically, the pain is shared and recovery is slow and takes painstakingly long. While we believe that there could be prolonged pain in European economies, we are not so sure if the situation will precipitate quickly into an economic collapse.
The stock market is currently fearing the worst – a potential default and actually discounting it. The actual outcome could well be a bailout or arrangement of sorts. When the actual outcome is not as bad as people feared, the market grows irreverent and returns to buying mode. The time to actually take a contrarian view is when the markets fear the worst. Clearly, we should be showing a contrarian bent now.
How do we steer clear of the doomsayers and set forth on a path which others isn’t willing to embark upon? If everybody expects the worst, we would be inclined to think that it can’t get worse than that. Rather than worry and go into a state of flux, we would objectively evaluate opportunities which look attractive. A careful evaluation of the merits and demerits of each investment idea should be done swiftly. Careful notes must be made on each idea. A comparative evaluation of companies will help us rank them and identify a hierarchy of `like’ able ideas. Once we identify the ideas, we can set price levels at which the investment becomes attractive and then fix prices at which it turns into a compelling bargain. We can space our purchases between these two prices and ensure that we buy more stocks closer to the bargain prices. Sounds clinical isn’t it?
Great investing is about being clinical when there is chaos in the markets. The chaos maybe all around you. But, you must act like you are the Red Cross on a Salvage mission with total focus on what you are salvaging out of the chaos. Learning to allow valuations to prevail over sentiment will work effectively if you ignore the contagion and look at the opportunity in a clinical way. The operative word is `clinical’.