I had done the following post in the 1st week of June, 2006. Except for the numbers, the story is just as fine. It originally appeared in the Personal finance section of moneycontrol.com

Okay, so the market fell 1,100 points on 22 May 2006, it fell 350 points on 31 May 2006 and another 327 points on 1 June 2006. What is to be done?

 

Just go back in time. Rewind to Diwali 2005. All the bulls including die-hard bulls said the market would have done great if it ended Diwali of 2006 at the same index as Diwali 2005. No expert was willing to brave even a 9000 call.

 

What actually happened? Just go back to your older files, and refresh. The market made these bulls look ordinary. January, February, March…. the markets cross 11,000 then April sees 12,000. Then, we celebrated.

We made 12,000 stickers and stuck it all over the place. We made T-shirts, mugs and celebrated 12,000.

 

Then the market had a hiccup. We panic. We sell. We cry. We moan. We expect the Finance Minister, SEBI Chairman and all of them to crowd near the wall to save humpty dumpty.

 

In reality, nothing is lost. Just rewind to Diwali in your time calendar, you would be thrilled with the 10,000 index. Rewind to February when we were still celebrating 10,000. Just because we ran too fast in January, then galloped in March, April and May we are now worried. Just slow down and you will be fine.

 

The key takeaway,The market will do what the market will do. You have to do what you have to do’.

Markets will be volatile. You will see a sensex of 10,000 and even perhaps 20,000 in a 12-month period. As a rule everybody loves a bull market. So the FM, the SEBI Chairman and everyone else will look worried and will try to talk up the market.

Keep in mind – for 3 years we have believed that markets cannot come down, and interest rates cannot go up. That might be about to change. We believed that a 2-day fall would be followed by a rise. We believed that the market is fairly valued at 3000, 5000, 8000, 10000 and 12000. We may rethink. We believed that you could go to the terminal in the morning and come back richer at the end of the day with Rs 5,000 or Rs 50,000 simply by buying. The bigger you bet, the greater was the gain. We may rethink on that. We believed that we could build our own portfolio and save the asset management charges that mutual funds charged. We may rethink on that.

 

The lessons are very simple.

  1. Asset prices fluctuate and they are inversely related to the interest rates. Markets are but an asset class. If it goes up, it will come down.
  2. Individual investors will come, conquer, panic and leave. FIIs will do similar things. You need to act sane. Nothing changes in the economic situation. The solution lies in having an investor mindset rather than a trader mindset.
  3. If you have money for the long run (I mean 3 years at least) you should be in the market. If you need to pay your EMI by selling shares, you should be praying in a temple.

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  1. very accurate description of retail investor behaviour and media attitude. I think if you record all that the media says (or experts say on media) and play it back after 10 months, you will have a humour magazine!

  2. This is what I said few days back on a post. When market goes up, every so called experts shout for buy… and when market goes down.. same experts shout for sell..
    Its individual’s take to how long hold a share and when to book/loss.

  3. buy on upward trend, sell on down trend.. if someone wants to follow stoploss, it’s up to individual investor. doesn’t matter for long term investor, keep accumulating

  4. i wonder how the asset markets would behave in a sound money scenario -where central banks cant tinker with money supply or interest rates and rather they are determined by demand and supply like everything else in the free market. i am willing to bet that volatility would surely be vastly reduced and markets would be “boring” places where people dont play on vega and delta and assorted greeks. centrally planned systems are inherently unstable.a robust market would need high level of decentralization.especially of money

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