In October-November 2008, there was excessive pessimism around. In fact that period could take the cake for being one of the most challenging periods for most investors. It was a period when not just equity markets but also bank accounts were no longer considered safe. Everyday you heard noises of FMPs, liquid funds and even banks going bust and how the financial world would end soon. In fact the only safe way was to hoard cash. One currency expert even went on air saying that he was closing all his accounts at private banks and stashing his dough at State Bank of India, SBI. Suddenly people queued outside SBI branches and SBI started collecting several thousand crore of deposits every day. It was outright foolish to do so but the herd mentality was at work and the headlines and experts were screaming doom.

One smart investment banker redeemed his FMP midway falling prey to such rumors and at a discount. The FMP is up 11% today. He regretfully now says “Sometimes it’s dangerous to know many things. I would have been better off not knowing many things.”I told him that I disagree as it is all about your ability to think rationally during such times and not following all the bull thrown at you. I told him that I know of smart people who know things as well as people who do not know much about investing who have made amazing gains because of their ability to filter the noise.

On the other hand in October 2009, one is witnessing euphoria all around with the stock markets having crossed several milestones.

There are 3 key lessons or principles that equity markets have once again taught us over the last one year and they can surely come in handy when we face a similar situation sometime later in our investing life.

1st Principle

Besides investing regularly in equities (as the SIPs during these periods have given the best gains), invest a lot more confidently when no one wants to even listen to the word equity. The whole world was full of insights, research, inputs and so on about the death of equity as an asset class. There were media reports on the poor data coming from every possible front and to top it there was the Satyam scandal which made a lot of foreign and local investors doubt the integrity of Indian managements. Everyday you read about the next set of companies who could be in trouble. A friend who wanted to invest in equities just could not because all around he read that we were headed for doom. By the way he is still waiting.

There is no way to know that the stock market has bottomed out but it’s during such times of excessive pessimism that the market turn around and this was demonstrated well even during the recent turnaround on March 9, 2009.

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