What to do ?

Yesterday, my friend asked me that with risk of US Recession looming large, what to do in Indian stock market? Is it time to sell or buy or to do nothing?

Before giving my views on the above question let me give some background.

US sub-prime crisis fear impacted US and world wide stock markets in Aug 2007 and consequently BSE also fell to 14000 in Aug 07. However, BSE bounced back and touched an all time high of 21206.80 on Jan 10, 2008. As of today (Feb 08,2008) BSE is at 17526.93 , that means a drop of around 17.5% from peak. Drop of 17.5% is misleading as majority of the stocks have corrected more than 30%.

What has changed in last 1 month that has triggered this stock market correction/crash?
Many factors, few of them are

1. Heavy speculation was going in market. Companies with no fundamentals or profits were hitting new highs everyday. One of such example is Reliance Petroleum. At 52 week high price of Rs 294, it had market cap of Rs 130,000 Crs. Amazing isn't. A company with no profits and assets under construction was valued so high.

2. US economy has slowed down for sure and there is divided opinion that US is already in recession . Meaning business in US has tough present and future(for some time at least).

3. Growth rate in India has been revised downwards. Refer to this BBC link.

All this means that profit growth rate for Indian Companies will slow down.


Coming back to the original question, what should a investor do?
Again, before answering let me say something more.

There are two types of retail investors in Indian stock market.

First type are the ones who want to make quick money in market. They want to follow every move of the market and are largely driven by the news around. They do not have perspective beyond few months or at max 1-2 years. (Majority falls in this type)

Second type are the ones who are in market for long haul (5-10 years or more). They do not follow market much , but they invest consistently for years. The whole idea of the market for them is long term wealth creation. They know market behave erratically in short term but logically in long term. They do not panic when their portfolio is down by 20 -30%.
They treat stock market investment just like a PF or a recurring bank deposit. Most important, they realize that big money in stock market can be made by remaining invested and it is impossible to time the market. However, they do churn their portfolio from time to time.

Ask your self what type of investor you are or what type you want to be and you'll get the answer of the question asked in this post.

Recession come and recession go, that is the nature of economy but stock market remains and thus remains the money making opportunity.
One more thing, in stock market optimism is max at top and pessimism is max at bottom.