Beware of market reports!

"Markets go from gloom to boom in 1 year" screamed headline in a newspaper on 9th March, 2010 - anniversary of the recent stock market bottom.

It was on 9th March last year that Sensex had closed at 8,160.40 points, lowest closing value since the 2008 sub-prime crisis began. It scaled to 17,052.54 exactly a year later registering gain of roughly 109% over a year, outstanding performance by any standards.

Market discussions apart, let us go back to the headline referred. What is the headline trying to convey? It is not that gloom has gone away and boom has returned. It says, the mood among market participants has changed from gloom to boom. This headline was not an isolated case of such reporting. It was a reflection of the sentiment exhibited by various players. The headline or such news indicated that the mood of various participants is directly correlated to the level of Sensex - gloom at low levels and boom at high levels. Such adjectives ("boom" and "gloom") only refer to reactions by market participants to the events of the past. In other words, the market has not moved from gloom to boom, but from low to high.

So often, our reactions are based on what has happened in the past. It is ok as far as learning is concerned. We experience some event and the outcome of the same and learn from it. In real life, we have learnt the art of learning through past experiences. But, learning happens when we let our intellect analyze the whole situation. Instead, if we let our emotions do that for us; we end up on the wrong side of learning only to repeat the same mistake again and again. The above headline is a reflection of such an emotional response to what has happened in the past.

If we just take this as advice instead of a piece of reporting, we are likely to repeat the mistake that many investors have repeated ever since the invention of Capitalism. They have bought assets at high prices only to sell later at low prices.

Leon Levy writes in his book "The mind of Wall Street"; "The reason why most get it wrong in stock markets is that there is a gap between the actual risk and our perception of the same. Most of the times, the risk is at the highest when it is perceived to be at the lowest and vice versa. The risk of terrorist attack was actually the least after WTC event, but the whole of US was terrified."

If we allow the emotional rollercoaster to take control of our lives, even the God Almighty cannot save us. And if we love the ride through this emotional rollercoaster, watching movies or the IPL would be cheaper than losing our hard-earned money through investments. We invest our money, after all, to get a good night's sleep. If we lose our sleep because of the very investments, we better avoid investing at all.

In the early days of my career, some friends and I used to play a guessing game. We tried to guess whether the stock market would have closed high or low on that day without looking at stock exchange terminals or without asking anyone. The business related Television channels had yet not arrived then and internet was quite unknown. The game was simple. We used to wait outside a trading room at the close of the market hours and watch the faces of the people walking out of the room. The direction of the market was generally written on their faces.

As it is said in Sanskrit, "manah ev manushyanam karanam bandh mokshayoh!" It's all in the mind. The biggest risk to an investor's financial well-being is generally seen in the mirror. Investing guru Benjamin Graham has said, "The investor's chief problem - and even his worst enemy - is likely to be himself."

Controlling one's emotions could be a difficult task, but then that is at least within one's control. Read the news for the reporting and not for the predictive ability, as there is none.

All the Best!

- Amit Trivedi

The author is proprietor of Karmayog Knowledge Academy. He can be reached at karmayog.knowledge@gmail.com

 

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