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Monday, June 23, 2008

How we can beat stock markets volatility

[How we can beat stock markets volatility,investors and traders/bargain hunters/how warren buffet and berkshire did it/s&p 500/marc faber says 12k support for sensex/MARKET NEWS/stock market- operated by chidambaram?/SHOPPING TIME/people stuck in put options/Right time to buy shares/Oversubscription Figures I P O/Suggest stock for long term/SUB-PRIME ISSUE/BSP withdraws support to UPA Govt/future and option]


Just play smart in indian stock markets:-For many investors,volatility is an anathema.We all like to invest till the market is going one way and thats up.The moment the market starts behaving eratically or moving down,the normal reaction of the small investor is to run.For seasoned investor,though volatility or bear markets arent a hindrance at all.These investors on the other hand,dont particularly like runaway bull markets,as they pull up asset prices to levels where it becomes difficult to find buy' opurtunities.

Now check the record of the greatest known investor,Warren buffet.His firm birkshire has a performance history of 43 years,from 65 to 07.In these 43 years,Birkshire has had only 1 year of negative returns-in 01.Mr buffet prefers to benchmark his performance against the S&P500.

Berkshire has underperformed the S%P500 in only 5 out of the last 43 years and none of them has been in times of falling markets.S%P had 10 years of negative returns in the last 43 years,including 01.In 9 out of these 10 years,Berkshire has given positive returns and it has outperformed every single year.S&P500 worst year was 74',the year of the first oil shock.The index fell 26% that year.Bershire net asset value rose 5.5% in the same year,outperforming by 32%.S&P500 fell 22% in 02 and berkshire rose 10% that year,again outperforming by 32%

Any investor is finally interested in positive absolute returns,but if you look at outperformance,good investors tend to do the best in bear markets.Berkshire has,on and average,outperformed S&P500 by 25% in the 10 negative years of the index.In no other set of 10 years,does berkshire acheive this feat.For example,in the 10 best years of berkshire,it has outperformed S&P by only 15%.Another interesting fact about berkshire is that it is more likely to underperform in a bull market.Of the 10 best years of S&P, Berkshire has underperformed 4 times(of its total of 5).

Not everyone is buffet but the insight is clear-bear markets are not something to run away from.On the contrary,it is possible to get positive returns during down-turns.It is also likely that stocks bought cheap during a bear market helps to give strong returns in bull markets.The benefit of the bear markets could continue into the bull markets.So in any point of time,if volatility transforms into a temporary bear market,dont get flusterfed.That could be the time for you to set youself up for a long innigs.

Well i know its not prudent to talk about bear markets.But experience plays a vital role and thus expect more titilation of the same in coming notes too.



Regards,
ARUN
I can be reached at:arunanalyst@rediffmail.com

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