How to make money, today

It's a minefield out there for anyone trying to invest his way to prosperity. The global credit crunch, asset deflation and economic stagnation stare most countries in the face. The world's consumption engine (the US) and its production counterpart (China) are running out of steam, while the rest of the world slides further into the abyss. Closer home, India's honeymoon with growth is, at best, under a stress test as its most profitable and enduring businesses battle slowdown pangs. The worst-case scenario includes post-election political imbroglio and social/ecological disruptions, which threaten to drive down earnings or affect earnings growth for years.

And yet, there is money, real money, to be made by investing in this market. You will be surprised to know that the times have changed, but the rules haven't. The simplest rule could come to our aid in the days to come: be greedy when others are fearful. Did you notice the sharp bounce-back after the October 2008 crack, and a similar reaction after the late February 2009 sell-off? In less than six months, we have had two terrific opportunities for whoever wanted to wade in (and quickly out) of the swirling currents of despair (and hope) in the market.

The pullbacks from October were rapidly lost and the global 'bear market rally' in progress since early March may also peter out. There are enough reasons, macro and micro, to trigger another tailspin, but some calculated risk (not tottering, leveraged and reckless over-exposure) was worth taking after both the lows.

This is not to say that stocks look cheap, that leading economies will claw back to growth and that the massive quantitative easing and clean-ups around the world will infuse lifeblood into the global sinews of finance. All that the recent 'recovery' means to me is that there is a pullback in oversold markets. That this is a reliable lead indicator of economic recovery is wishful thinking.

Remember that the rehab plans are only providing money for refinancing or disposing of toxic assets, not addressing the basic issue of bad assets and over-leverage. So, we may see more trouble as government bandaid runs into the ground after the initial relief.

This brings us to the real question facing the investors right now. If we have not hit the bottom (as it most certainly seems), then when will see it? For a proper bottom to form, there has to be fear and, indeed, revulsion, as repeated bear market rallies peter out in the face of persistent economic gloom. This would make the current rally one in several such mountains of despair in the making, worth a trade when it started, but finally, likely to end in despair. Note that both rallies have had far too many pundits prophesising the 'return of good times'. In behavioural terms, there is still too much of irrational hope sitting on the sidelines, willing to fantasise at every rally.

It is when the backs of these peddlers of hope are broken, when gloom and revulsion set in, when the equity markets are seen as nothing but false pretenders of wealth creation, and when large-scale abandonment of faith happens that we will see a real bottom being formed. It is at such times, when others are fearful, that you should turn greedy.

Buy the falls, meanwhile, but be sure to trade out!

Dipen Sheth is Vice-President, Institutional Equities, BRICS Securities Ltd.