Saturday, September 20, 2008
Destination unknown - global financial crisis
Conventional market logic argues that whether a stock is attractive or not is a function of price - at a given price any stock will be attractive for buying and at another given price the same stock would be extremely expensive to own.
However in the current environment, I would argue that this logic has been turned upside down (so far as it pertains to financial stocks in developed markets).
There have been many instances of a solid franchises falling 50% and then another 50% and in a few cases another 50% (Fannie, Freddie, Lehman, Bear, AIG, Merrill, HBOS, Morgan Stanley,UBS)... The inherent complexity of the situation is beyond the ability to fathom for even the most sophisticated investors. No one knows whats going on and no one knows where things are going to blow up next.
Thus the present situation is quite unlike a conventional economic cycle where things get bad but we know they will turn for the better. There will be a few years of disappointing performance but things will get better. Even now things will get better, but when established franchises go bankrupt (and more than one such franchises has met such a fate) in a matter of days things are unlike anything we have witnessed in recent past.
Trying to pick a bottom is crossing the thin line between being brave and being foolish. Its akin to shooting in the dark - we may hit the target but there can be little to take credit for. In this regard we are in the midst of a journey into the unknown - with too many unknown unknowns out there...
The dust will settle eventually, but it needs to settle before we can fathom the true scale of the crisis that has hit us. But as some guest mentioned on CNBC the other day, its too late to panic as well...