Thursday, September 2, 2010

Where will the 'market' go now?

Answer: No-one knows!

Well, sorry! If you thought this was a post which will give you details as to where the market (index) will go from the present level, you are going to be disappointed. Because, I honestly do not know. (No-one does!)

The reason for writing on this topic is as under:
Me and some investor friends were recently having a discussion on this topic, as to 'market kahaa jayega'. Some poeple presented logical and valid arguments, along with supporting data, as to why the index should fall. Others presented a counter-view which was equally logical and supported with data. This got me thinking and the result is that you people have to read another post of mine!

Where will the index go next? Well, each person will have his own view and logic on this topic, depending upon one factor; how much is that person invested!

For those who are heavily invested and are sitting on little cash: This camp will always say that the market will go up. Reason? Well, its because they are already invested to a great extent. People belonging to this camp will read up on and pay most attention to all positive factors, macro and micro. (This happens sub-consciously and not deliberately.) They will gather and collect data which supports their argument that the market has to go up. They will sub-consciously disregard or give little importance to negative facts or find justifications against them. They will always reach a conclusion that the market has to go up. And the sad part is, they think that they have done this 'logically', without any bias.

For those who are on huge cash and are not heavily invested: This camp will obviously say that the market has to go down. (That is why they are on cash, right?!) The people belonging to this camp will do the exact opposite of the people belonging to the first camp. They will gather information and data which shows an extremely grim and negative picture which is conclusive 'proof', supporting their hypothesis. Again, the sad part is that they will sincerely think that they have arrived at the most logical conclusion. They too will sub-consciously ignore all the positive factors and fixate upon the negative ones.

So what can we learn from this?

  • Our mind is extremely well designed to JUSTIFY. By hook or crook, the mind will find out reasons to justify an action. In the present case, the action is of being invested, or being on cash. In any case, the mind will work in a way to accurately find out reasons to justify this action.
  • Ideally, these reasons should be found first, then the action should follow. However, here, it will inevitably happen that the reasons follow the action. Is there anyone who is fully invested, willing to say that the 'market' has to fall?? Nooo! That person will obviously say that the market will rise! It happens all the time.
  • So, what should be done about this? The answer is pretty simple; DON'T TRY TO GUESS WHERE THE MARKET IS GOING! It is a waste of time and energy. We invest in individual stocks. So doesn't it make sense to concentrate our attention and energy on those stocks and companies, instead of trying to time the market? 
  • Stocks should be bought and sold on their own merit, irrespective of the market conditions. Personally, I think that is the best way of doing things!
I agree that saying all this is much more simple than actually doing it! Not many will have the courage to buy, when everyone around is saying 'the market will fall'. Very few can do it. But then, very few earn extra-ordinary returns in the market, right?

Cheers and happy investing!