Friday, October 5, 2012

Markets on Fire - Boom or Bubble?

The SENSEX which stood at 17300 points about a month ago, has shown a steady rise to close above 19000 yesterday - a 15 months high.  The economic press was filled with the stories of this continued rally.  I started wondering, what is it that is pushing the markets high.  Did anything change fundamentally during the last few days to justify this rally?  But the markets have always been like this!  And this is where the greatest lesson for small-time retail investors lie.

Let us look at the stated reasons behind this rise.  A slew of announcements from the central government, like FDI in multi-brand retail, aviation etc. and increase in diesel prices and a cap on the number of LPG cylinders, which are expected to push the reforms further, is all that what we had during the last couple of days.  Keeping aside the increase in diesel prices, all other announcements are just announcements and yet to be implemented.  Yes, it is true that the Rupee has gained value against the dollar and the RBI has marginally reduced CRR.  Yet, the hardcore issues like inflation continue to haunt the policy makers.  So, what is it that drove the markets up?  The answer is simple - these announcements, or to be more precise, the news of these announcements.

What the small time retail investor should learn is that the markets do not necessarily react to events.  They react to news!  I keep giving the following example while teaching investments.  When you hear the news that your close friend is getting married, you jump out of excitement and reach out to congratulate him.  You do this immediately, though your friend is yet to get married.  And on the day of his marriage, however happy you might be, you would never experience and exhibit the same excitement that the news of his marriage brought to you when you heard it first.  If this is how individuals behave, can the market, representing a huge congregation of individuals behave differently? No.  Hence the markets almost always react to news and not events.  Barring few occasions, when an event as well as the news of the event comes together, in all other cases the news comes first and the event later.

So, the small-time retail investors have to be very cautious during this time.  Most of the times, they are the last to enter the market lured by the upward trend and after they enter, the markets start moving in the reverse direction!  While I am writing this, I can already see that the Sensex has fallen more than 100 points to close at 18939 today!  My suggestion to such investors would be to avoid speculation based on the short-term movements of the market.  I still believe that the economy is fundamentally strong and investments with medium to long term perspective (in good quality stocks) would definitely generate good returns.  All small investors should always look at equity as a long term investment.

7 comments:

  1. Really Nice one sir...
    Rightly pointed still Indian markets are yet to be matured compared to western Markets n retail investors are the least money makers on whatever market.Its just b'coz small investors information they have in hand is very less while they make investments and least bother to get it. Still retail investors are emotionally influenced rather radical thinking behind there investment choice or picking up there portfolio.
    As I always say whenever I speak to my clients n friends is that - THE MARKETS ARE WISE N THEY NEVER CHEAT - ITS ONLY OR FEAR N GREED.
    People instead timing or scratching the head for news. Invest systematically n regularly which by n large makes really smart n decent returns on there investments.

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    1. Thanks a lot Mr. Rajashekar. As a person interacting continuously with small investors, I am sure, you know their pulse better. As you rightly said, they have to consider systematic plans more seriously.

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  2. Grreat observation, timely suggestion with an extraordinary example. Kalpataru B

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    1. Thank you very much Dada. I am happy to see you on my blog. I look forward to your suggestions/comments in future.

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  3. Sir, equity investors should always look for valuation of stocks and not to overwhelm by the news which cannot be measured. Investors should know that equity investment would lead to wealth creation and participate in the growth of the company. When company grows, so does investor's money and economy as a whole. "Think long term, Act in the short term volatility".

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    1. Yes, Vivek you are right. And the biggest challenge for them is indentifying the stocks that would grow over the years.

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  4. The best way for retail investor is just follow some principles of Benchamin graham and all the principles of Warren buffet.

    With the entry of FIIs the market becomes more volatile,who react to each and every news line.

    as a retail investor one should follow buffet " swim against the tide " . Find out good companies( Good management,Growth prospect,reasonable P/E and Book value) and look for the opportunity. When the market is down buy more and more shares and once the market is up and you make reasonable margin sell the shares.

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