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A Positive Out Of The Many Negatives

Can the current market crisis be looked upon at positively for long-term investors? Dhirendra Kumar thinks so

For anyone who plans to make money from investing in stocks and equity mutual funds, things look bad indeed. Since about 2003, whenever the stock markets have dropped, there have always been only one or two factors that have driven it down. This was also true when the first precursor to the current troubles appeared back in August last year.

However, all that has changed now and everything appears to be going wrong simultaneously. The international credit crisis that looked like a local US problem hasn't really gone away. Oil prices and inflation have become a huge crisis. Corporate profits are under tremendous pressure. The once-invincible tech services industry is reeling from a weak dollar. Geo-political problems look worse than ever. And the Government of India has gone into full damage-enhancement mode wherein almost everything it is doing seems carefully planned to worsen the country's problems.

In short, it's a great time to invest in equities and equity-backed mutual funds. That should be obvious, no? Here's an old Wall Street joke that would have been a PJ if it didn't ring so true. A newbie asks an old-timer, "How do you make money in the market." The wise man answers, "Nothing could be simpler: buy low, sell high." The beginner asks, "How can I learn to do that?" Comes the response, "Ahhhh…that takes a lifetime."

But such a simple and obvious truth probably comes as a surprise to most of us. The reason is that the public discourse and media coverage about stock investing has become completely poisoned with the most extreme kind of short-termism. Every day, the business newspaper and TV channels come out and tell you that things were bad on the stock markets because prices fell. And that's the attitude that we absorb without thinking about it.

So pervasive is this attitude that lots of investors I talk to are changing their investment plans, getting out of stocks and dropping all plans to invest in stocks. Surely, this makes sense only for traders who bought yesterday and are selling today or are buying today to sell tomorrow. For an investor who is investing for his and his children's future, plunging markets and all-round gloom and doom are good news. Since the way to make money is to buy low and sell high, low prices should make buyers happy, shouldn't they? To this, the traders' answer is that the markets could keep plunging. But that's even more good news. This is the time to start investing in a conservative mutual fund and going on doing so gradually for a long time. Of course this works only for long-term investors who are putting in money for five years or more.

If stocks turn up from here onwards, then you will be fine because you would have invested at least some of you money at low levels. If they drop a lot from here on, then too you are fine if you continue investing at lower and lower levels. The only way you could actually be in trouble is if stocks keep dropping for years and years and don't recover for a decade or so even to today's levels. I'm not saying that that couldn't happen, but if it does, then it will be because we are in deeper trouble than we can even imagine today.

Meanwhile, all of us who want to grow our money would do well to stop thinking of the current crises as being bad for the future of our investments.