The Hindu Business Line : <I>We stand corrected! </I>

Every time the stock market takes a tumble and investors burn their fingers, the experts console them that it is after all a normal correction, and to be expected. One is used to thinking that a correction normally follows admission of a mistake. So, what might this suggest — that there was some combined major mistake committed by the mass of investors and traders, over a period while the market indices seemed to defy gravity and that the forces of Nature (read, randomness of markets) are now trying to make amends for it? This is an interesting and intriguing question. It would be very funny if it weren't tragic for so many.

Really a jackpot

The other day, I chanced upon a page from a business magazine of September 2005, used as wrapping paper; a boxed item in it spoke with unmistakable glee of the Sensex crossing the `magic' number of 8,000. It also related how each successive thousand points had come faster and faster. The ride from 5,000 to 8,000 (that is, an increase in value or implied return of 60 per cent!) was achieved in under 280 days. A tremendous jackpot for both punters and savers, by any stretch of imagination.

Now contrast the recent picture: As we speak, the market seems moving towards the same magic number, but accompanied by dread and foreboding in the air. The magic has evaporated from the number. Now, suppose you had actually bought the broad Sensex index for a few lakh rupees worth early in 2005, which was not so long ago. You would still be sitting on a miraculous return of over 60 per cent in 18 months, or a simple 40 per cent a year. Yet, why the breast-beating and bafflement, the wailing that can be heard all the way from Dalal Street to the TV studios? If this be a correction, then we may well ask what the error now being set right was.

`Magic' of 8,000

Research findings from all over the world in fairly stable markets have shown an average return of 15-18 per cent per annum over a portfolio to be a long run reasonable level; and one ought to be satisfied with it. Now let us even suppose that you had bought into the Sensex not at 5,000 but in September last year at the `magic' number of 8,000 — and exited when the world seemed to have collapsed around the ears of some last week, at just about 9,000. What would you have earned? Obviously the return would be 12.5 per cent simple, for a period of about nine months — or over 16 per cent annualised. That is a clear ten points over the running inflation rate, if you wanted to look at real returns; and at least 7-8 per cent higher return than risk-free bonds. And this, mind you, is after the collapse variously described by the incessant TV chatterboxes as mayhem, bloodbath and other gory epithets. In other words, the `magic' of 8000 is entirely in the eye of the beholder.

Mindset needs correction

What needs to be corrected, thus, is in the mindset of the investor in the stock market. It is the crazy spiralling upward which should have been admitted as a dangerous error while it happened — and acknowledged as risky territory, when no fundamentals of the economy would justify it. The correction seen in this light is good sense returning, and no disaster. A little sophistication in thinking and avoiding the herd mentality, lapping up all the blah provided by the `idiot box', could help.

(Feedback can be sent to srchander23@netscape.net)

S. Ramachander

More Stories on : Stock Markets | Insight | Jottings

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Weaving in labour reforms

Germany, bouncing from obscurity to action

Engaging the Chinese dragon

Insular PM?

Are today's managers effective?

We stand corrected!

The central banker's puzzle

Rediscovering India