Sunday, November 27, 2011

Heightened uncertainty

There was a time, sometime ago, a few years back actually, when things could be predicted "long term". Today, that word if used either tends to show your lack of knowledge on anything, or a surprise that he isnt already perished along with the dinosaurs.
Today, almost nothing can be predicted even for 5 years (or less). Not even govt. bonds. Not sure when a govt will topple and default on all the previous commitments/bonds. The existence of worldwide currencies (e.g:euro) is at stake. Gold, once upon a time long term investment is at peaks and nobody is entirely sure why its rising. Whether it is because it is supposed to be a hedge against inflation (as traditionally "they" say), or against currencies, or against a no growth scenario...?
Oil is also equally uncertain. the volatility in this commodity has been huge despite nowhere near corelation to its demand, which is more or less steady.
During the good olden days, assume maximum fluctuations where near 20% a year, meaning both the crest and the through. Today, just the crest or the through have a minimum movement of 20% a year, irrespective of whether it is currencies, gold or oil (or even interest rates in India).
Are all the companies factoring their worst case scenerios in reality in their business plans? I think not. They should ideally be more conservative and have more cushion for a negative surprise currently, and for the next few years. 
What does this entail for investing in particular? Previously, we used to bet for growth alone assuming all the above mentioned factors as constant or with a little movement. But today, these assumptions cannot be taken for granted. They entail enormous effect on the results and each of these are inter-co-related in many different known and unknown ways and levels. The effect of one can either neutralise the effect of the other or compound the effect of the other and this influence can change day to day. Today you need to better analyse more than one variable to get to the base and expected scenario.
There is some opportunity in all this afterall. The high volatility in everything obviously means there is more money to be made with the highs and the lows as there is to lose money also. The question is are you treating this as a cautious opportunity or as a complete threat?

No comments:

Post a Comment