With the Sensex diving below the 4,000 mark, the bull run has now been firmly aborted. Earlier in this column, I had elaborated on the virtues of being pessimistic and booking one's profit before the market started collapsing.But leave alone pessimism. At another level, it simply meant seriously heeding the signals that came your way from time to time. For those who have closely followed the market, it was clear that the speculatives and the Sensex were finding it difficult to keep climbing higher and higher. While this was mentioned in my technical column, I had asked how long the speculative lobby could keep the values up. Yes, ultimately the bulls had to call it a day, especially with FIIs not making an additional investment. And those who did not book their profits earlier can only now fret.
Since the last two days stock prices have been moving southwards with no let up. Once the bubble bursts, it is chaos. Even as you struggle to call up your broker, you have lost another 10 per cent, all in amatter of 2-3 minutes. That highlights an important aspect of stock markets. What you must realise is that market is like a sea. Before you jump into it, you might as well take stock of what you are doing. If you have ventured into it without realising that there would be tides and currents and whirlpools, you will pay a heavy price, losing not only your shirt, but sometimes your life. Have you not heard of a broker committing suicide? Let that not happen to you.
The markets are unforgiving, whether you are a novice or a seasoned player. The bursting of the bull bubble might as well be the reason for you to sit back and introspect. Such an exercise should help prevent you from making further mistakes.
The small investor, who has limited time and money at his disposal, should not come to believe that he can master the stock game quite easily. The stock market is a place of complex dynamics. Understanding every nuance take a life time of learning. Yet, it is possible to adopt some general thumbrules.
In the first place, never seriously play with money which you cannot afford to lose! The famous rule is - Rule No.1. Do not do anything that could see you end up losing your money. Rule No.2. Never forget Rule No.1. It is good to remind yourself of these rules, as the market keeps tempting all the time, especially now when values are dipping for purchases.
In the game of stock playing do not be an extremist. Being moderate does a lot to your purse. What does being an extremist amount to? Every investor dreams of getting in at the bottom and getting out at the very top. This is not only an unrealistic expectation, but could be your undoing.
Never expect that you will be able to get out right at the top of a bull run. The current episode should have made you more wary! Even a well seasoned player cannot predict 100 per cent at all times. Analysts often have to grapple with technical arguments about an extended bull wave. But leaving technicals aside, look at the termination of thecurrent bull run. Many of you might have nurtured hopes that the Sensex would after all cross 4,226 and head towards the 4,500 level. And that hope made you blind to the fact that the index was struggling for over a week to cross that barrier.
Or even if you were aware of the Sensex's struggle, your greed for higher profits made you ignore that signal. Ultimately, the inevitable happened, but rather unexpectedly. This time round it was the bursting of the software bubble that triggered the collapse. Let me dwell on this a little more as there is a lesson to be learnt here. It has all the ingredients of a typical stock market story, where you stray away from a dispassionate assessment to a speculative positive thinking!Surely, the software stocks had everything to recommend them.
An assured growth rate of at least 50 per cent with corresponding growth in net profit of anywhere between 60 and 80 per cent. But, no one stopped to ask why the same stocks were quoting at a much lower price only a few daysago, for the fundamentals were the same at that time as well.But once the heat is on, your perception of what the real worth of the software stocks is starts changing continuously. If MNCs can be quoted at 50 p/e multiples, why not software stocks? Because these companies were assured of at least a 50 per cent gain in net profit every year. But there is more drama to this story. The bull run on software scrips was engineered. FIIs, brokers and promoters got into the scrip at low prices, before they unwound the game at the bourses.
While the game plan was on firm foundation of software scrips deserving better discounting, the final decision as to how high the stocks could go rested with these front-runners. So, ultimately, these front-runners did feel that Sensex was struggling to move higher and it was time that the game was ended. But you must note that even what they did was responding to the struggle of the Sensex. But then there is no knowing if they could have carried on the game till the Sensextouched 4,500. May be it was some of the stakeholders like FIIs and mutual funds who thought that enough is enough.
In such a game where you are not the decisive game player, the only way you could have protected yourself is to get out earlier than these people. The moral of the story is: be respectful of the market signals. And be reasonable about your profit expectations.
Oh yes, the Sensex could have gone to 4,500, and you could have made another 10 per cent. But then you know the other side of the story. By not getting out earlier, you could have lost 20 per cent very fast. Now let bygones be bygones. Now that the market is sliding you need to make sure that you do not repeat your mistakes. Specifically, do not make the mistake of just rushing in to buy. The market is likely to go down in waves (that is going down, recovering and going down again). A technical column should indicate how far it can go down. But no one can predict closely the extent of movement on a day-to-day basis, not at all stagesof the market. And finally, do not be tunnel visioned. Before you pick up the phone to call your broker, ask yourself: What would it be like say in a week from now or two months from now. That should be your charting magnet.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
