5 Star Rated Advice: Deciphering the S&P US Downgrade

“Who is this S&P?” asked my South Indian friend Swami to my broker over a cup of coffee.

Swami, who generally spends time with his family over weekends, suddenly called me on Sunday afternoon, and said he wanted to meet my broker friend Jignesh who knew a thing or two about investing. I was not quite sure what it was about, but being a close friend, I arranged for the meeting. Swami seemed quite perturbed when he came home. “Arre – they are saying Indian market will fall because some S&P downgraded US. I want to understand why”, he explained as the reason for this sudden meeting, while we were leaving my house. So at around 6 pm, we met over coffee.

“Arre, it is a rating company”, responded Jigneshbhai. “Means?” queried Swami, not quite sure what a rating company does. “They provide ratings for different things, like companies, governments, anybody or anything that has a financial instrument or offer.” “Why?” – continued Swami, still not sure why something like that is needed by anybody.

Now Jigneshbhai thought it was time to really explain things properly. “Dekho – how you read reviews of movies in Times of India sometimes, and then decide whether or not to watch the movie. If it gets 5 star, it is a hit, so you go and watch it, if it is 1 star, it is a flop, and you don’t watch it. Like that, S&P provides star ratings to anyone who wants money – like companies, countries or anyone else. If it is AAA rating, people who have money, give them money easily, if it is lower, then they will think more, or charge more interest. Like that – understood?”

Finally, some spark dawned on my south Indian friend, who was otherwise quite a bright chap. But not fully lit up, he continued, “So that S&P is saying US has lesser money than earlier? So their economy is in trouble” “Something like that” responded Jigneshbhai, not quite wanting to get into detailed arguments about fiscal deficits, interest rates and recession, I assumed. He thought this was the end of the discussion, hoping he does not have to explain more, and quickly started asking me how are things at home and work in general.

But his hope was short-lived. After a few sips of coffee, Swami came back. “Arre Jigneshbhai – but sometimes I have seen that the same movie gets different ratings in different papers. Also, Times of India ratings are wrong also sometimes. They give 5 star and I watch the movie, it is rubbish. And they give 3 star, and movie becomes a big hit.” I could sense a mix of curiosity and optimism in Swami’s eyes as he asked this.

Now that the question was asked, my broker friend decided to go the whole distance and provide solace to Swami’s unsettled mind once and for all. “Yeah, sometimes, they can give 5 star to stuff that is rubbish, and low rating for good stuff too. Sometimes it matters, sometimes it doesn’t. Sometimes it also depends on who the producer or star actor is – isn’t it? If the season is bad, sometimes all movies flop for the time being.” I could see that this confused my south Indian friend a tad bit more, as he lost keeping track of the metaphors.

Continuing, my broker friend said, “But why do you worry about it? If a good movie gets a 2 or 3 star rating, its opening may suffer, but if it is good, people will decide for themselves, and go and watch it later anyway, no? So – if companies continue to increase profits, they will become hits, people will buy their shares and markets will go up, else they will become flop shows. So, you just focus on selecting good movies to watch and good companies to put money on” laughed Jigneshbhai, giving my south Indian friend 5 star advice.

Finally as we finished our coffee and left, he added, “The world is worried because the US went from AAA to AA+. Rather than worry about the US getting downgraded, I wish someone in our country worried about how we will upgrade from our BBB rating.”

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