Senselessness in the Sensex

The last week or so (trading week I mean) has seen the flag-bearer index of the Indian stock market plunge by around 20-22%.... Market capitalisation has eroded by 18 trillion bucks (lets just say that its too many zeroes to be counting).. ... Retail investors as always have been pinched worst (I have had a notional loss of 20% or roughly 60k in a matter of 2 days).... In Ahmedabad (the stock brokers' capital of India) police had to cordon off a lake so that people wouldn't jump in, attempting suicide... Once again people (like u and me) are questioning the wisdom of trading in the secondary markets...


Various aspects pertaining to the crash have been dissected and analysts have been unanimous in identifying the "recession" in the US as the main reason for the reverses. The US Fed cut rates by 75 bps the largest cut since 1984 in an attempt to pump in more liquidity into the system (the global financial system apparently).. So what all has gone wrong suddenly?

- Have the phrases "if the US catches a cold the rest of the world sneezes" or worse still "if the US sneezes the rest of the world catches a cold" been proved right?

- Has the Indian markets' over-dependence on FII inflows been exposed?

There might be multiple reasons but what's been most striking (to me that is) have been the vulnerabilities of an Indian investor's mindset and the lack of understanding and deeper analysis of the trends in macro economic indicators by Indian Market analysts. Many of my friends have been talking over the last few days about whether its just time to sell everything and stay with cash... and I find it very amusing

From being one of the most risk averse individuals, the Indian investor over the last 2 years has turned into one helluva of greedy fellow. Greed by itself is bad enough but greed compounded with lack of knowledge is a disaster and that's exactly what we are experiencing now.

- Business new channels providing 24 hr news on markets, stock picks, investment calls etc..

- Mutual fund agents carrying glossy pamphlets with sky rocketing graphs denoting their fund's performance

- Asset management companies providing 'advice' on smart investment strategies

today an average investor has a deluge of information. Information that is confused and misunderstood to be knowledge. Opinions and promises is NOT knowledge. The poor middle class guy has not understood this distinction. Knowing stock codes, brokerage rates, NAVs and issue details does not amount to much. Return on Investment expectations of 30-40% are illogical. I am not saying that every investor should learn "Corporate Valuation"... But investors should atleast know solid investment principles...

- picking industries and stocks that offer long term growth

- Not buying stocks of companies that you aren't too sure about but just because they have been on the top gainer's list

- Realizing that brokers make money only when you buy or sell so there's no point in just blindly believing trading advice

- having reasonable expectations of return. While at an overall economy level companies growing at 20% even the most carefully picked portfolio cant give you consistent returns of anything more than 20% in the long term

- Conviction that the markets are a long term game not a day-day or a monthly one. They might be so for day traders and investment firms (purely because they have a cushion of funds that can absorb losses) but not for you and me

- Moving from a 'sell at every fall' to a 'buy at every fall' mindset (of course aided by a good reason to buy i.e. good companies)

Ok if the Indian retail investor is bad the Indian analysts have fared no better. There has been so much use of the much maligned term "recession". But no value adding opinions given to substantiate the reasons. For starters how many people have bothered to explain to the junta about what they mean by recession in the US economy. In pure macro-economic terms recession is defined as "two consecutive quarters of negative economic growth". Now when we are talking about a phenomenally huge economy like the US growth by itself is at very moderate levels (2-3%).. So negative economic growth is not as much of a shocker as it could be India... In addition to this no detailed opinions have come forth from Indian analysts quoting "US recession" as a dampener on what is driving the possibility of recession in the U.S., in terms of sectors, is it consumer driven, policy driven, industry driven etc..

What is also surprising is that one of major theories that have surfaced in the last decade or so pertaining to macro-economic indicators of developed nations "The Great Moderation" theory has been untouched in opinions and views. Its a fabulous piece on why, if viewed from the experience of the past 2 decades the fluctuations in macro economic indicators are not going to be too drastic or prolonged. In effect they cant have too many shock effects on investment, spending, savings etc..

I don't mean to say that the markets are in no trouble. I don't think these are just over-reactions. My point is fluctuations are very inherent to a market that is driven by so many factors. It will remain to be so and will not be a simple upside or downside story... If it were that simple every one would just be a billionaire or will pull out of the market. What's important is for the common man to stick to basics of good investing aided by some elementary knowledge. As far as experts go, they should come out the "sound byte" mode that they are in for the sake of television and try and provide some meaningful (even if contrarian) inputs through valuable research and analysis.

Ok now lets recoup some losses...