Mar 5, 2009
Will the Markets Go up? - This is the question people have been asking in the recent past after the crash of markets. But you hear this question all the time-be it bull or bear run.
Whenever you discuss markets, some in the group automatically treat some others as “experts” and ask them this question. You find these experts in all the conversations all the time everywhere. When we gather either in a party or wedding or any other function, during free time we make a small group. In one of the groups you will find people discussing about finance. It can be anything from fixed deposits, mutual fund, gold, real estate or stocks. Suddenly whoever talks louder or talks more is treated an expert. He will tell you that “Gold will go up by 10% by this weekend. Better to buy now”, “Flat prices in Mangalore will reach to Rs. 4000 in few weeks time” (He will claim that he has spoken to the biggest property dealer or some politicians). Some immediately differ .One of them will say markets will come down. Flat price will touch Rs. 2000 very soon. You will find two types of opinions there. One of them is negative and the other positive. But none of them is right. Because, we tend to talk without taking into consideration, the factors which contribute to the upswing or downfall of the market. You meet the same group next time. If the markets have gone up even slightly, you will treat the person who said the market would go up as “Genius”. If the market has come down even by a bit the person who said the market would come down is “Genius”. You will keep on contacting one of them until you realise that there are so many geniuses around.
I was talking about the roadside experts in the above example. But in the television and in the print media also we find the experts who have been really studying the market. They have studied a lot about markets. They have been taught where to invest, how to invest stuff like that. Yet in a same show (in the television) two experts differ. Only one of them will be proven right. (Should I say marginally right?). The other will definitely be proven wrong. Why? They are doing the jobs of astrologers. Have two astrologers ever told you the same thing about your health and wealth. Most probably it is no. Why so if they have studied astrology as experts of the subject? Because they are talking about a science which was discovered much before we came to know that earth revolved around the sun. In their calculations sun revolves around the earth.
How the market works?
Markets do not go up as people or expert predict. Markets will always go up until a negative trigger comes in (Mostly in the bull market). Negative trigger can be anything. It can be a rumour, fact or any negative news for that matter. Financial markets are just like fish market. Demand and supply play the role here. Fear and greed are also the factors here (psychological). Fear and greed drive the demand and supply.
Markets too can come down everyday (Especially in the bear market) if they are already in the downswing and positive trigger does not come at all. What is positive trigger? That is positive news about a better thing. It can be news from the government or any agency or central bank. It can even be news about better monsoon.
Mainly demand is decided by the participation of buyers. Do you know how many people are going to buy tomorrow? How many people will have excess cash to do that? How many people are in need of money and will sell?
Historically, they are too many tools which are used to know about the market. Mainly of them are fundamental analysis & Technical analysis. Fundamental analysis is the study of fundamentals of a company past and present which are used to forecast the future. This tool is used with a philosophy that investors may have ignored the fundamentals of a company in the short run but ultimately they will discover the true potential of a company later. Technical analysis does ignore the fundamentals completely but studies the pattern or trend in the price movement of the company. No Investment company completely relies on any one of the types of analysis. They may depend on both types of analysis. That itself should explain how effective these tools are independently in certain circumstances.
Shoot them at sight
Shoot the predictors at sight. Am I too harsh? Then prosecute them. No market predictor has ever been prosecuted in India so far. A good analyst can never predict the market in a short term. Yes, long term they can predict. Even a fool can predict it. As I will say later in this write up that the markets in the long run will always go up. Nothing can remain in zero forever. It has to move up. Because everything moves up in the long run in the market. Otherwise you would not have been participating.
But again if we look into the recent history sometimes predictors (I repeat sometimes) have been proven right. Why so? As per one survey, the market watchers have been simply watching the predictors. Because they feel that the players will follow what the predictors say and invest accordingly. For example a market watcher or an investor like you and me will hear what a most famous analyst is saying and simply follow him. That itself will drive the market up. If 50000 investors at once decide to buy scrip A, the price of it will definitely go up. You must have been getting some messages on your mobile that company ABC will move up tomorrow. You do not ask why it should move. It will definitely move up if there is no negative news and provided all or most of the people who received the message decide to buy ABC.
Why some brokerage houses without you even paying them a penny tell you that some scrip is a hot favourite? Because they must have bought the scrip yesterday. If with your kind participation it moves a bit tomorrow, they will sell it. But you will hold for longer period, because they have told you that it would fetch you “substantial” returns.
What is your bread & butter?
I visited a small town in Chikmagalur district few months back. While I was sitting in my friend’s office at around ten o clock in the morning, I saw a deluge of people walking towards an office. Upon asking my friend, I was told that all of them were into stock trading. They had started neglecting their farmlands and started visiting the stockbroker who had then recently opened his office. My friend tells me now that they do not visit the office anymore. But they are working again in their farmlands. Now while they were visiting the stockbroker everyday from 10.00 to 3.30 were their main bread and butter business not neglected?
Most of the traders or players in the market do not come from a special trading background. Most of them especially from our region are either has worked abroad or accumulated money from other businesses. I have seen some retired people in their sixties doing stocks. They say that it is not their main business. But they spend the whole time with brokers or in front of their computer. It is possible that they are doing it to pass time. But there are other avenues too to pass time without risking your money.
So many of us have become stock traders without any experience. I have seen many of them who do not even possess a basic knowledge about stocks. They just watch television and read newspapers and decide about stocks. I have even seen some of them simply buying some stocks just because the price has gone down by 10% or more in a day. They say that it has to move up. But some stocks which have started going down will never move up. (Not in the near future definitely)
The derivatives like futures and options which were discovered as hedging tools have been and are being used as speculative tools. Many retail investors have fallen in this trap. They do not care about the strength of the shares and future prospects.
Always keep in mind even the so called safest shares have let down people. You must have seen “Past performance is not an indicator of future prospects” in mutual fund literature. The regulator has made it mandatory. Unfortunately, “fine prints” in all the investment related literatures are ignored by most of us.
All these years you have been buying junk or wrong stocks. Or you have been buying and selling at wrong times. How do I know? I know certainly because I am not talking to institutional investors, manipulators, successful stock traders but to retail investors who have been losing all the time. A study says 95% of the investors lose all the time and 5 % of them gain all the time. Do not you think this 5 % to go up?
This is biggest problems we are facing. And we will always face this problem. No stock market can ever work without crooks. We call our markets to be very mature. Nobody knows what makes it mature. As per my knowledge more participation of people (as a per cent age) can make the market of USA most matured. That can be the only reason. Even if you make a stock market in heaven the worst of the best people will come together, make a cartel and manipulate the market. Always keep in mind that a few people of these cartels make money by short selling even in downfall of the market. So while the negative news impacts you it does not do so to few people.
We talk about watchdogs like SEBI and RBI or many other agencies. They can not be doing the right things all the time. These agencies for some practical reasons or due to lack of manpower can not track all wrong movements. In some cases they are political compulsions. Nobody becomes BIG before buying the politicians.
In all the markets be it mature or not, you find “likeminded” people coming together and forming cartels. This has been going on from the time immemorial. No agencies can easily track their movements. If at all some of their activities are tracked, all of them are not caught. Only one of them or few are caught. But manipulation does not end there. You also find the nexus between politicians, crooks and media. They show you something and say that you are in heaven. By the time you realise that you are in hell, they are not there.
Markets will always go up. All the short term negatives will be ignored by the market. Be it property, mutual fund or stock it will always go up. But you should know when to buy and when to sell. To give you an example let me turn to property. If you bought 10 cents of land for Rs. 20 lakhs yesterday and the price has gone down to Rs.18 lakhs do not blame anybody. Either you should have bought it when it was Rs. 15 lakhs or you should sell it when it reaches Rs.25 lakhs. If you did not have prudence at the time of buying, then you should have some patience before you sell. You can buy shares of company A at 90 or 100 on Monday; you can sell the same shares at 100 or 110 on Friday. If you bought at 92 and sold at 105, you have made a profit of 13 per share. If you bought it at 100 and sold at 102 you have made a profit of 2 per share. I do not know at how much you bought it. If a single share can make this much difference, now imagine a bigger portfolio making a difference.
Markets will ignore everything. All the negatives will be factored in the long run. Well even after these negatives and scams a market can give you better results than expected. But to achieve these results, buying any stocks will not suffice. Only best of best will outperform all the odds. (Best does not mean only the fundamentals of a stock but also at how much you bought it at)
You Know everything but still do not know anything
You do not know anything about the future or I. Did you know that they would be an attack on Mumbai? Did you know that there would be a sub prime crisis in USA? Did you know that Satyam balance sheet would be inflated? You did not know. Neither the any analyst did know. Had he known, he would have revealed it to you happily. Negative and positive things will keep on popping up. Nobody for sure will know what it is going to be.
Let your priority be on beating the inflation. History says that shares will outperform other asset classes. Till date it has been proven right. Wrong and junks stocks will not take you there. Again I say the prices at which you buy and sell too matter. Avoid (completely please) trading at borrowed money. Keep in mind your age & risk appetite. Everybody wants to make money quickly. With this intention only you buy. But if due to factors beyond your control this does not happen, please do not be disheartened. Expand your investment horizon. As long you are holding a good stock, you are safe. Please do not use the hedging tools like options and futures for speculative purpose.
I do not know will it rain or not tomorrow. I can simply get away with saying that raining chances are 90% and the non raining chances are 10 %. But I know that it will rain this year. I will not say when and how much. But I can guarantee that if it does not rain at all this year you can hang me.
Markets will move up this year. It can be from 9700 to 15000. Or even to 30000. But If it comes down to 3500 (Some analyst used to say only in the distant possibility of an asteroid colliding with the earth there was a possibility of market crashing) please do not blame me. Wish you all the best.
Richie John Pais is a Mangalore based businessman, Social activist & Financial Counselor. He can be contacted at email@example.com. Mobile: 9886430574