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On March 9th, 2009 the Sensex closed at 8160 points. Cut to just around over
one and a half years later, at the time of writing this, the Sensex is at 20345 - a
whopping 12185 points or 150% higher. Who could have ever thought that
this was possible?
This is precisely the reason why I have repeatedly observed that the market
is like a class room where we are taught lessons. The same lesson is taught to
you time and again till you learn it properly. Once you
have finished your learning, you move on to the next
class room where you are taught another lesson.
Successful investors are those who learn the most
lessons along their investing life.
The first lesson which is repeatedly taught is that it is
pointless, even impossible, to predict the market. Yet,
we refuse to imbibe the same. Investors continuously
tend to look towards self-styled experts and market
gurus to give them a prediction about the expected
Sensex level. Currently, there are various predictions
going around that the market will breach 23000 by
the year end and that we may actually witness a level
of 25000 by the end of the fiscal year and so on --- the
actual number doesn't matter, the amusing thing is
that none of these people were able to predict the
imminent rise beforehand, however, once the market
started flourishing the 'experts' have started
envisioning all time highs and great achievements for
time to come. And on the flip side, when the market
was sliding, these very same people were busy making dire 'predictions' of
approaching doomsday thick and fast.
Herein emerges another lesson that we can all learn. And this lesson is best
summarized by the following quote by Bernstein William in this book “The
Intelligent Asset Allocator”
"There are two kinds of investors --- those who don't know where the market
is headed, and those who don't know that they don't know. Then again,
there is a third type --- the investment professional, who indeed knows that
he or she doesn't know, but whose livelihood depends upon appearing to
know." Truer words were never spoken.
History has repeatedly proven, time and time again, that it is impossible to
time the market. National, international, political, geo-political, economic ---
there are far too many factors which simultaneously affect the stock market
and it is humanly impossible for anyone to forecast the index level.
Like I said, as I write this, the index is at 20345. But no human being is capable
of knowing for sure where the market will close tomorrow evening, or the
next week or the next month or even later. So, if you invest or disinvest based
on market movements or expected market movements, it amounts to pure
speculation. And know this much --- you can either speculate or accumulate,
but never both.
Incidentally, the main thing that is causing anxiety among investors about
the current level is the anchoring or benchmarking effect. The market is
deemed to be overheated at 20345 partly because it is so close to the
previous all time high. If this (previous all time high) figure had been say
25000 points instead 20873, investors in general would have felt far more
easy about the current level. That being said, since valuations have risen so
rapidly with the Sensex trading at 21X trailing earnings and the rally not being
as broad based as one would have liked it to be, it
wouldn't be a bad idea to book some profits as one
goes along.
However, it is important not to go overboard.
Liquidate around 20% - 25% of your portfolio. Invest
that money in a liquid plan and start an STP
(Systematic Transfer Plan). This way, not only would
you have realized some profits, but will also maintain
participation in the market.
What makes India so attractive is that, at an
astounding 8.5% pa. we are one of the fastest growing
economies in the world. At a time when the West is in
the midst of nationalizing its banking system, Indian
banks are well capitalised, well regulated and most of
them are already nationalised. A savings rate of 35%
and a favourable demographic model makes India as
insulated as it can be against a global recession.
Therefore if RBI manages to control inflation thereby
maintaining the purchasing power of the rupee, in an
economy that has limited dependence on exports, growth can be
maintained on the back of domestic consumption itself.
This situation reminds me of a quote from Warren Buffet. He said “Five years
from now, ten years from now, we'll look back on this period and we'll see
that you could have made some extraordinary (stock market) buys. That
doesn't mean it won't get more extraordinary a week or a month from now. I
have no idea what the stock market is going to do next month or six months
from now. I do know that the economy, over a period of time, will do very
well, and people who own a piece of it will do well. Just don't borrow money
to buy your piece.”
While Mr. Buffet's statement was to do with the US market, it can literally be
copy-pasted for our market too. Over the next five-ten years, India will do
well. Do participate in this prosperity. And the best way to do this is by staying
invested over the long-term. Do not try and time the market. Despite all the
upheavals and turmoil that we go through, at the end of the day, India is
progressing. And this progress will manifest itself in the stock market one
way or another. The timing is irrelevant, that it will happen is certain.
Whether you can benefit from it is up to you. The question is --- are you up to
it?
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