Monday, September 1, 2008

Markets - Kal aaj aur Kal

Recently a friend asked me, "What are you recommending to your clients in these times?" Emphasis was on 'these times.' I was little confused. I did not understand the underlying meaning of 'these times'. According to me we are going through perfectly normal times. There isn't absolutely anything abnormal about 'these times'.

According to the friend, markets are down and times are bad. Now, I agree markets are down than the level we had seen at the beginning of the current year but what is bad about it. Isn’t it normal for market to go down?

The only constant in market is rise-fall-rise-fall. This has been happening ever since markets have been established. Somehow when markets are rising investors feel the rise will be forever and when it falls investor’s think of doomsday. Honestly markets move somewhere in between. They will never rise forever and there will never be dooms day. Only thing is investors who will spend ‘time-in’ the market will create wealth and investors who rely on ‘timing’ the market will eventually lose.

Though there is no empirical data to support the point, but the fact is that only fourth of the investors in equity market go on to create immense wealth from equity market and hold on to it for decades and generations. These are prudent investors. Prudent investor is one who makes good decision. Good decision comes from experience and experience comes from bad decision. Therefore those investors who would have made bad decisions and yet remained in market for long will create lots of wealth for long time. These are investors who would have seen at least two or more market cycles. Rest all investors enter equity markets during its rise. When markets fall they leave the market considering it to be speculation den. In next rise new set of investors enter market and the series continues.

Historically markets have risen, fallen and risen again. May it be Tulipsomenia in Holland in 1634, Equity markets bubble in London, Paris and Amsterdam in 1720, Railway mania of Britain in 1845, Rise and fall of Premchand Roychand in Mumbai in 1865 or recent tech bubble of 2000/2001!

In the year 1992, Indian equity markets started rising. Reasons – or we can say excuses – were liberalization, end of license raj, ‘tiger uncaged’ etc. At its peak Sensex crossed 4500 mark. Soon Harshad Mehta scam was unearthed. Sensex fell to around 2000 level, a fall of more than 50%. In 2000, when Sensex again started rising reasons were technology will change our lives. In this rally Sensex easily breached 4500 and went ahead to cross even 6000 mark in intra-day trading.

In 2001 market again fell. Reason was tech-bubble burst. By mid 2003 market was at 2700 level. Fall of more than 50% from its peak of 6000 during technology boom.

From mid 2003 equity markets again started going up. ‘Reason’ – “India Shining.” Soon market crossed 6000 level, which it had crossed in 2000 rally. In fact market went on to cross 21000 levels. When market fell, it went down to less than 13000 levels. Market fell because of reasons – inflation, oil prices, political uncertainly, sub-prime crisis etc.

So, the pattern of rise-fall-rise-fall is constant in the market though the reasons for rise-fall are different. Sir John Templeton has rightly said “The most dangerous words used in the stock market are, this time it's different.”
Gaurav Mashruwala

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