We are currently going through historic moves in the market place. Moves of 6% – 7 % in the indexes in a day doesn’t surprise anymore! The VIX index has been approaching historic high ( 60- 80) against average of 15-20 just few months ago. A high VIX index reflects fear and uncertainty in the market place. Although I did witness the NASDAQ bust of 2001-2003 , what is going on now is far worse. No asset class has been spared- debt market, credit market, equity market, currency market, commodities market have all seen massive fund liquidations. What is amazing is not only the depth of fall but also the speed of fall ( the momentum to downside). A good example would be a high of $147/ barrel for crude to a low of $49 barrel in a span of 6 months. Same deal with precious metal Silver from high of $21/oz to $8.60/oz in a span of 6 months and there are numerous other examples. What is one supposed to do in an environment like this? Is there a silver lining in all of this?

I will answer the above two questions one by one. As far as what to do is concerned, my first advice would be to avoid extreme sentiment swings. Meaning don’t get euphoric when you see a 10% rally and don’t imagine the end of world every time Dow Jones Average takes a 500 point plunge. The reality is probably somewhere in between and an astute investor has to guard his emotions against wide swings. Emotional swings compromises our objectivity and prevents us from taking rational decisions. So be rational, if the system you follow( Fundamental or Technical) tells you to sell the asset class sell it, if it tells to stay invested or build a position, then by all means stay long. We have all heard about market’s Random Walk Theory and to a large extent it is indeed true. That said, there are many systems which do have an edge , if there was not any (edge) we wouldn’t have legendary investors like Warren Buffet or George Soros. Make sure the system you follow has an edge, a positive expectancy if you will. Also know that markets change, so a system that worked a year ago may not work today, and there are various way to test this thing out ( back testing, taking win-loss ratio and looking for systemic deterioration using statistical tools and many more). Who said investing was easy, it never was and it never will be. Try to use your best judgment and don’t beat yourself over it, we all make mistakes!!

As far as question number 2 is concerned, is there any silver lining in all of this, the answer is an unequivocal yes! There is always a silver lining when an event of this magnitude takes place. Here’s what I am looking forward to 1) An all round de-leveraging going on which will, in the long run, improve the balance sheet of corporations, individuals and probably governments too ( hopefully if they learned their lessons well). 2) It will hopefully lead to healthy new regulations designed to prevent such excesses in the future 3) The financial industry will re-invent itself, probably going back to basics- looking at the credit worthiness of their customers, encourage savings, transparency, risk control, growth with discipline, low debt equity ratio and above all understand the risk of unbridled greed!

And hey, as I write this Gold has staged a decent 14% comeback rally ( from $700/oz to $800/oz)! May be it can lift other commodities from their funk ( Silver, Crude, Copper, Platinum can all mount a strong comeback rally). After all the governments around the world are reducing interest rates at massive speed and literally printing 100s of billions of dollars in bailout money. At some point this is bound to increase inflationary pressure and those who are invested in commodities today will be laughing all the way to the bank!! I already start feeling better!!!

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We are currently going through historic moves in the market place. Moves of 6% – 7 % in the indexes in a day doesn’t surprise anymore! The VIX index has been approaching historic high ( 60- 80) against average of 15-20 just few months ago. A high VIX index reflects fear and uncertainty in the market place. Although I did witness the NASDAQ bust of 2001-2003 , what is going on now is far worse. No asset class has been spared- debt market, credit market, equity market, currency market, commodities market have all seen massive fund liquidations. What is amazing is not only the depth of fall but also the speed of fall ( the momentum to downside). A good example would be a high of $147/ barrel for crude to a low of $49 barrel in a span of 6 months. Same deal with precious metal Silver from high of $21/oz to $8.60/oz in a span of 6 months and there are numerous other examples. What is one supposed to do in an environment like this? Is there a silver lining in all of this?

I will answer the above two questions one by one. As far as what to do is concerned, my first advice would be to avoid extreme sentiment swings. Meaning don’t get euphoric when you see a 10% rally and don’t imagine the end of world every time Dow Jones Average takes a 500 point plunge. The reality is probably somewhere in between and an astute investor has to guard his emotions against wide swings. Emotional swings compromises our objectivity and prevents us from taking rational decisions. So be rational, if the system you follow( Fundamental or Technical) tells you to sell the asset class sell it, if it tells to stay invested or build a position, then by all means stay long. We have all heard about market’s Random Walk Theory and to a large extent it is indeed true. That said, there are many systems which do have an edge , if there was not any (edge) we wouldn’t have legendary investors like Warren Buffet or George Soros. Make sure the system you follow has an edge, a positive expectancy if you will. Also know that markets change, so a system that worked a year ago may not work today, and there are various way to test this thing out ( back testing, taking win-loss ratio and looking for systemic deterioration using statistical tools and many more). Who said investing was easy, it never was and it never will be. Try to use your best judgment and don’t beat yourself over it, we all make mistakes!!

As far as question number 2 is concerned, is there any silver lining in all of this, the answer is an unequivocal yes! There is always a silver lining when an event of this magnitude takes place. Here’s what I am looking forward to 1) An all round de-leveraging going on which will, in the long run, improve the balance sheet of corporations, individuals and probably governments too ( hopefully if they learned their lessons well). 2) It will hopefully lead to healthy new regulations designed to prevent such excesses in the future 3) The financial industry will re-invent itself, probably going back to basics- looking at the credit worthiness of their customers, encourage savings, transparency, risk control, growth with discipline, low debt equity ratio and above all understand the risk of unbridled greed!

And hey, as I write this Gold has staged a decent 14% comeback rally ( from $700/oz to $800/oz)! May be it can lift other commodities from their funk ( Silver, Crude, Copper, Platinum can all mount a strong comeback rally). After all the governments around the world are reducing interest rates at massive speed and literally printing 100s of billions of dollars in bailout money. At some point this is bound to increase inflationary pressure and those who are invested in commodities today will be laughing all the way to the bank!! I already start feeling better!!!