At the height of the fear that US is going into a recession, on Monday, Jan 21st, 2008, Asian markets were in a major turmoil. US markets were on a holiday on this day. In India, it was a painful day for those who invested in shares. BSE’s SENSEX was more than 1400 point down at the closing on this fateful day.
Next day, on Tuesday 22nd, it was reported that the US markets were going to slide about 400 – 500 points down. But before that, the US Federal Reserve (the central banking system of the United States) delivered one of their biggest interest cuts in history stabilising the US capital market at open by the evening (Indian time) in the process. US markets managed to maintain much better figures on the back of that cut though at the close of the market, it was still in the -ve.
One wonders why Indian markets comes down so heavily due to the problems in the US while it makes little sense due to the fact that India’s economic story is one of domestic consumption and investment.
Chronology of the Roller Coaster SENSEX Ride.
Day
Score Card Remarks
Day 1 Monday,
21st Jan 2008
BSE’s SENSEX is more than 1400 point down at close.
On this day, fall was so great that all previous blood baths in the SENSEX wane in comparison. Trading was briefly suspended due to the ferocity of the fall.
Day 2 Tuesday,
22nd Jan 2008
SENSEX is more than 800 points down.
Intraday movement more than 2000 points down at one point. Trading suspended again due to the ferocity of the fall. In the evening, news breaks that American Federal Reserve reduced interest rate by 75 bps fearing the US market collapse at open.
Day 3 Wednesday,
23rd Jan 2008
SENSEX rises more than 860 points mainly due to the previous days interest rate cut in the US.
SENSEX also recorded biggest single day intraday gain of over 1200 points on the same day.
Day 4 Thursday,
24th Jan 2008
SENSEX closed down 372 points.
Today was uneventful.
Day 5 Friday,
25th Jan 2008
SENSEX rises 1,139 points.
Biggest single day gain in history. SENSEX shuts shop at 18370.
What a week! No one has ever seen something as gigantic as the above. Right from Monday to Friday as you can see above, markets took investors on the best roller coaster ride in the world. Many suffered enormous loss and few gains. Recovery is yet to find some pace as I give the final touches to this story on the 29th. However, let us hope that the recovery is just a matter of time.
I am writing this new story as part of our online share trading guide to highlight the perils of the share market in the short term.
Those of you who are beginners, understand one thing from the week above that markets can be harsh bordering madness in the short term. See the way it zigsawed! unbelievable movements resulting in stunning losses! Note that such crashes will spare no one; not even the most market savvy. Understand that the short term might give you good gains but pains can be equally dreadful. So, learn to think long term as it has been stressed all along in our online share trading guide.
Let me remind you, If someone does not see his portfolio for a month or two during this fiasco, by the time he sees it, sea might be calm and quiet; erasing all loss by the time he logs in again. Instead if he saw the wind coming as you can see from the tremendous losses above, he is sure to catch cold and take drastic action like selling in heavy loss which is the ultimate mistake one can make under the circumstances.
Most people who watched the news before this great crash would have made out that a storm is brewing in the market because there was so much talk of US recession and the banks as big as the Citybank were announcing losses to the tune of 10 billion dollars. But no one would have thought of such a ferocious fall.
What one must do at such times?
What one must do during such times is, ‘Do Nothing’ and just believe that ‘This too Shall Pass’. Within days, weeks, or sometimes months, markets will recover and get back on its toes. How long it takes for that recovery depends upon various economic and sentimental parameters of the market during the period. The great crash of May 2006 had taken approximately six months for a full recovery. What one can and must do during such a crash which will result in mouth watering levels of price for your favourite scrips is, invest in them by buying. Always do that buying in parts as no one would be able to tell you that the bottom of the crash has been reached.
For a long term investor, such falls are a non event. Because he knows he has to be patient, that he is in the market for years, and hence he does not lose his cool. But those who are listening to someone say “Stock markets are the way to riches” without understanding the risk involved and without planning for a long term stay, could be in for trouble.
Hence the advise is – be there for the long term. Don’t put all your money. Go for a systematic invest plan (SIP) based Mutual Fund if you prefer mutual fund route or invest in the same style through online trading through systematic monthly deposit of your savings into equity. Increase the investment during crash, correction, etc when you get shares cheap and reduce the investment during huge rallies and uptrend when shares are not cheap.
Finally. let me also tell you what happened to my still-in-the-teens portfolio. I had earned a profit of over 60% for a portfolio that I begun to build at the end of 2005. However, the crash of the January 08 under discussion, broke my back and I had a brush with losing part of my principal amount by the time crash came to its fiercest stage. Today on the second week after the great crash, I am sitting on a 20% profit again, but still have miles to go.
However, let me reiterate that my confidence in Indian economic growth is unwavering! I am only growing more and more confident of the market delivering the riches as I read into the economic and business story’s unfolding even while facing the prospect of a US recession.
