Economy turmoil – Investors and Corporates

An investor OJ says he lost all his money in the current stock market turmoil. Almost 80% of his money is wiped out even as the market is on course.

He started investing in stocks only three years ago and found the market fascinating because it seemed to be going up every day. He slowly started pulling out money from his provident fund and fixed deposit and invested everything in stocks.

According to financial investors, they often come across stories such as this. Investors especially those with no previous experience investing in the stock market, tend to get carried away in a bull market. They break every basic rule of investing and would burn their fingers when the market changes track.

One of the basic principles OJ has overlooked is called asset allocation. Asset allocation, simply put, means the exercise of allocating money to different asset class. This exercise is done after taking into account one’s goals, age, risk taking capacity, as so on. This simple exercise will make sure that you are not at the mercy of a single market or an asset class.

For example, suppose a 30-year-old individual is starting his investment plan. In theory, he should be putting in majority of his corpus in equity. The thumb rule suggests that 100 minus your age gives the percentage of equity in a portfolio. That means the person should put 70% of the corpus in equity. He can change the percentage if he doesn’t want to take a risk. But the idea is to have a mix of equity debt, gold, and so on to make sure that he is not at the mercy of a single market.

For example, if OJ had followed the rule, he wouldn’t have lost 80% of the corpus in the market melt down. His debt part of the portfolio would have saved the day for him. Or the gold would have helped him to stay afloat.

So, before the market devours what is left with you, make sure you have a diversified asset allocation plan. Also, do not change it with altering market scenario.

Now coming to corporate sector CEOs can make a difference in business conditions of meltdown economy. Six months ago the talk among CEOs mainly revolved around India’s growth story and the speed at which companies were bagging global deals. Cut to the present and speak to leaders across India Inc and all one hears them talk about is cash conservation, cost cutting and revisiting, expansion plans. That’s the impact the global financial tsunami has had on companies across the world.

Apart from unprecedented measurers taken by governments and Central Banks, the spotlight is on the CEO the one person whose thoughts matter the most in any organization.

CEOs will need to concentrate on cash formation and conservative, cutting costs across the board and looking at strategic options for enhancing business such as value for money products. In the time of turmoil, staying positive is important. Corporate leaders have to stay positive in this environment and good communication and organizational flexibility are essential.

The change in mindset has surely got CEOs rethinking strategies and redrawing plans for the future. Perhaps, the best way to get a grasp on the thinking of CEOs across spectrum of companies is to get a perspective from a CEO coach. Based on his data points from various clients, a coach to over a dozen CEOs said he has witnessed CEO moods swinging from wild over-confidence to wild pessimism in a matter of 8 months.

After all market forces of perceived demand and projected supply result in the way valuations are decided. The forces of economies and markets create these cycles of prosperity and decline. But perception and sentiment are very powerful drivers of recession. The current mood in India, therefore begin to swing between the perceptions of impending doom and reality.

Companies who lead innovation may buck the trend. Given that the September quarter sales growth of a representative section of companies is in the region of over 30%, CEO are happy that recession has not yet hit corporate financials. What they are worried about is the impact of forex marking to dollar outflows on loans and commodities which is hitting the bottom lines.

From an economic view point, India has so far been spared from a dive into recession. We are presently in a phase where we can, with some care and innovation, come out of the crisis.