S&P downgrade : Caution or an Opportunity?

– Parag Parikh

The current state of stock markets the world over have unsettled the minds of the investors. In such situations we are prone to behave irrationally. Equanimity is important and to maintain that it is important to analyze the situation.

We tend to make decisions based on the currently, readily available information vividly displayed. Open any newspaper or flip through a business channel, or go to a party, there is only one talk of the US being downgraded by the S&P. Why? Because of the high fiscal deficit and the high amount of debt. Is this really new? Did not the world know about it? So why the reaction? Well it is because of the availability bias. Today the downgrading is the centre of attraction. Go back a couple of months in the memory lane. The 2G scam, the Anna Hazare fast, the CWC games scandal. When they were the centre of attraction the newspapers, the TV channels concentrated only on those news. Although none of the matters have still been sorted out, how much reporting does one see? Over the next week the euphoria on the down grade will die down.

The US problem was more compounded due to the political deadlock. The positive side – When the nation is at peril, the differences take a back seat and the patriotic spirit prevails. Change only comes when crisis arises. I am sure something good will comes of it.

1990/1991 saw India going bankrupt. A big shock. The liberalization process starts and India bounces back. What if you would have bought VALUE stocks during those times? So is the case just now. As the fear dies down and the reality dawns, things will improve. When this will happen, no one knows. It can be tomorrow, a week or a month or a year from now. You make the choice. But one thing is certain that if good businesses are available at attractive valuations which are run by good management these times offer great opportunities. Mind you I am talking for long term investors having the patience and the discipline to ride through the bumps.

One another bias investors are prone to is the Representative Bias. The 2009 crisis still haunts investors. The way the stocks lost values is still very vivid in the minds of investors. One should not consider the recent downgrade and the fall as a representative of the 2008/2009. This is very different. We are not in a situation like that.

Lastly coming back to the downgrade by S&P. Does the downgrade justify reality? Are the credit rating firms’ experts and do they have the core competency to understand and assess the real change that happen at the speed of thought and clicks in nations, economies, corporations and financial markets? If they were so good in their judgments what happened in 2008/2009? Were they able to assess the quality of derivative mortgage backed securities which led to the downfall of so many financial institutions and banks? Does AIG or a Lehman strike a chord?

We are living in a society where insanity and irrationality works. The best way to survive is to follow a process and be disciplined to keep to that. The process: Buy good sustainable businesses available at attractive valuations and run by good management. The discipline: Think long term and not be swayed away by market swings.

6 Comments

  1. Hi Sir,

    This article is excellent for the current situation. the points that you highlighted are very true and exactly suits the current situation.
    Thanks for such a nice article .

  2. HI paragbhai,

    As always, it is very knowledgeable article with a ray of light as a guidance to small and long-term investors like us who are totally unaware of the games played in the stock market. The method of investing in a discipline way suggested by you is truly the ONE AND ONLY method to be above the tide of stock market.

    Thanks you once again for guiding the investors in a correct way.

  3. With S&P Issuing a negative outlook on the US Economy for the next 2 years, the axe of another downgrade would always be hanging on the US so it is advisable not to invest in US Companies.

    However, this wont impact India much and valuations are dirt cheap at the moment and probably the right time to be parking some cash in fundamentally good companies

  4. It is nice article. I thanks author for writing this. U.S. will be remaining in slow down for a long time. In my view, developed country like U.S. cannot grow forever. They need to slow-down. But unfortunately, Europe is also going in slow down. It seems like western world is going in slow-down. They cannot borrow and grow for forever.

  5. its was a case of over excesive oportunity , where the world floked in to USA for $ , obviously, when paper money comes in an uncontroled way , the prob starts, (e.g credit cards) and as usually USA citizen as always under a influeze of self gratification , unable to handle situation , BUT they will come out very strongly but in a diff way , money spending sentiments have shatered . they have natural resurces , Intelectual pool , and most imp R&D and power to smoder smaller nations in a democratic way. india should be a part of its growth no doubt, they cant ignore . check and balance phase prevails . nothing to woy for long term investors. buy rhodia , a MNC which can generate income and create wealth too. but u need to keep it for 10 years , wht may happen ,

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