KEYNES, the most talked-about economist in these days of bankruptcies and bail-outs, once said, “markets can remain irrational longer than you can remain solvent.” While this theory is applicable to both bears and bulls, the underlying message is undoubtedly clear that rational investors can succeed if they can keep irrationalities out. The broader investment decision of whether to invest in equities as an asset class at a given point in time should depend on the prevailing stock market activity. While I also agree with the learned view that a retail investor should not try to time the entry and exit in a particular stock, I strongly argue that every investor can time the market to enter/exit equity markets.
Stock markets historically have peaked at a time when interest rates also peaked or tended to peak due to higher demand for market related credit fuelled by over confidence. There is an example of this not so “knowledgeable” investor friend who sold all his equity investments whenever the interest rates moved up and he used to then shift to traditional FDs and income funds. This investor started moving his fixed income investments into equities in the early days of this decade when the interest rates were at its lowest. The same investor again started shifting from equities to FDs in mid 2008, although he missed the peak of the markets in January 2008. Today this conservative disciplined investor has had the last laugh again while conceding that he has no great knowledge of economics. What moved him is sheer common sense and a strict control on emotions.
During the 25 years that I have spent in the market I have often noticed this correlation between interest rates and market peaks/troughs. I have no hesitation in siding with this investor who uses less of market information and more of common sense to time the market when one is bombarded with an unprecedented supply of market “information.” If the interest income is relatively high compared to the low risk associated with the product then there exists an opportunity to shift from equity depending on one’s risk appetite.
In contrast, I have this highly educated friend of mine who was brilliant enough to spot this particular multi-bagger stock when the price was Rs 150 around 10 years ago. When the price went up to Rs 1,500 in 2007 he decided to wait despite being advised to sell and book profit, at least partially. The stock started going down in the bear market in 2008 and after waiting for more than year through a bear market he got tired and sold the stock at Rs 200 while claiming that he was able to protect his capital. This is a mistake many people make particularly when they are credited with identifying a multi-bagger stock. Such investors most of the time fail to exit at a superior profit as they get emotionally married to the stock and refuse to recognise an impending market peak/trough. Contrast this with an investor who purchased the same stock at Rs 500 and sold at Rs 1,100. Wrong entry and wrong exit but made huge profit compared to the other friend who entered right and exited wrong.
While it is relatively easy to spot market cycles through a disciplined approach, it becomes extremely difficult for retail investors to do stock picking due to an oversupply of unreliable information. Unscrupulous manipulators abuse information to take unlawful advantage in the market often trapping the innocent investor.
There are two universes of stocks in the market. One with high liquidity and that are covered by researchers from many institutional brokerages. Due to continuous and intense competition between analysts it will be an efficient market for these stocks by all conventional academic definitions of efficient market. The theory says that in such a universe of stocks the market price reflects all publicly available as well as private information making it difficult to make any superior return from any research or information/analyst’s report. In this universe of say Nifty stocks one should try to just time the market cycle rather than pick stocks unless there is a definite strategy behind that.
However, the trap lies in the large universe of so-called mid caps and small caps in which there will not be any serious competition between analysts and hence the information, both public and private, may either be unreliable or misguiding. Retail investors should only buy stocks of companies that they know from this group. If an investor doesn’t know either the business or its management how can that investor be a co-owner in that business? Hence a disciplined investor who knows his stock will only be successful in this universe. Many investors who start equity investment with goals and discipline often end up as speculators but will never accept the fact. Very few want to be successful traders. Every investor wants to be a successful investor and many of them turn into unsuccessful traders losing their hard earned fortune to hungry brokers.
Stock markets historically have peaked at a time when interest rates also peaked or tended to peak due to higher demand for market related credit fuelled by over confidence. There is an example of this not so “knowledgeable” investor friend who sold all his equity investments whenever the interest rates moved up and he used to then shift to traditional FDs and income funds. This investor started moving his fixed income investments into equities in the early days of this decade when the interest rates were at its lowest. The same investor again started shifting from equities to FDs in mid 2008, although he missed the peak of the markets in January 2008. Today this conservative disciplined investor has had the last laugh again while conceding that he has no great knowledge of economics. What moved him is sheer common sense and a strict control on emotions.
During the 25 years that I have spent in the market I have often noticed this correlation between interest rates and market peaks/troughs. I have no hesitation in siding with this investor who uses less of market information and more of common sense to time the market when one is bombarded with an unprecedented supply of market “information.” If the interest income is relatively high compared to the low risk associated with the product then there exists an opportunity to shift from equity depending on one’s risk appetite.
In contrast, I have this highly educated friend of mine who was brilliant enough to spot this particular multi-bagger stock when the price was Rs 150 around 10 years ago. When the price went up to Rs 1,500 in 2007 he decided to wait despite being advised to sell and book profit, at least partially. The stock started going down in the bear market in 2008 and after waiting for more than year through a bear market he got tired and sold the stock at Rs 200 while claiming that he was able to protect his capital. This is a mistake many people make particularly when they are credited with identifying a multi-bagger stock. Such investors most of the time fail to exit at a superior profit as they get emotionally married to the stock and refuse to recognise an impending market peak/trough. Contrast this with an investor who purchased the same stock at Rs 500 and sold at Rs 1,100. Wrong entry and wrong exit but made huge profit compared to the other friend who entered right and exited wrong.
While it is relatively easy to spot market cycles through a disciplined approach, it becomes extremely difficult for retail investors to do stock picking due to an oversupply of unreliable information. Unscrupulous manipulators abuse information to take unlawful advantage in the market often trapping the innocent investor.
There are two universes of stocks in the market. One with high liquidity and that are covered by researchers from many institutional brokerages. Due to continuous and intense competition between analysts it will be an efficient market for these stocks by all conventional academic definitions of efficient market. The theory says that in such a universe of stocks the market price reflects all publicly available as well as private information making it difficult to make any superior return from any research or information/analyst’s report. In this universe of say Nifty stocks one should try to just time the market cycle rather than pick stocks unless there is a definite strategy behind that.
However, the trap lies in the large universe of so-called mid caps and small caps in which there will not be any serious competition between analysts and hence the information, both public and private, may either be unreliable or misguiding. Retail investors should only buy stocks of companies that they know from this group. If an investor doesn’t know either the business or its management how can that investor be a co-owner in that business? Hence a disciplined investor who knows his stock will only be successful in this universe. Many investors who start equity investment with goals and discipline often end up as speculators but will never accept the fact. Very few want to be successful traders. Every investor wants to be a successful investor and many of them turn into unsuccessful traders losing their hard earned fortune to hungry brokers.
