Stocks markets, they say, are driven by 2 emotions – Greed and Fear. However, as Warren Buffett puts it, there is no comparison between the two. ‘Fear is instant, pervasive and intense. Greed is slower. Fear hits!’
If we try to analyze past bull runs and bear downturns, there are several observations that can be made. Though these observations tell a tale, the usual disclosure that ‘there are no absolute truths about stock markets’ continues to apply here. Today I wanted to reflect on some observations I have made about stock markets over the years and how I am viewing the global stock market carnage of the last few days.
One of the things I have always seen about stock markets is that they always tend to overdo it. While a stock price over time tends to hover around the intrinsic value of the stock, more often than not, it swings like a pendulum around it due to a mix of macroeconomic and sentimental factors. So, if there is a bad news, panic sets in and the markets tend to free fall much below intrinsic value before sanity sets in and they come back. The same holds on the positive side too. Another important aspect is that the global economic climate influences the market mood and often hampers proper market decision making. So, if the going is good and markets are doing well globally, any bad news often just gets ignored. The same bad news creates havoc if markets are in a downswing. It is as if when the going is bad, markets almost hunt for bad news to justify where they are and react even more negatively when the news sets in.
The other thing to take note is there are 3 different views of any market – short term, medium term and long term. Out of these, the long term tends to be the easiest to predict. For instance, the Indian stock markets are currently down to the 5,000 NIFTY mark from the 6,300 mark last Diwali. There is some apprehension on where we might be headed in the near future. Some say, the NIFTY is headed towards 4,500 levels and others say we should soon have a sustained bounce back. But no one disputes the fact that in the long term, the Indian economy has sound fundamentals and the markets will tend to only go higher. The short term and medium term are much tougher to predict and everybody has their own theories about them. The other thing to note is that the pace at which markets rise tends to be a lot slower than the pace at which they fall. This is understandable since ‘fear’ is a much stronger emotion than ‘greed’.
With all this in mind, now coming to what I feel is the possible reason why markets have crashed over the past few days. In my opinion, the S&P downgrade of the US was just what we call a ‘trigger’. That was not the reason for the crash. Before the downgrade, the US market had run up quite strongly over the past 1 year with no meaningful correction. The markets were searching for a right trigger to bring them back to sanity. I agree that along with the downgrade there have been several other developments like the US & Europe debt crises and other negative US GDP data that have been quite poor too shpwing that the US economy might be slowing. But in my opinion, the markets are over-reacting. Alongside all this, there has been some very positive data on the job creation front too. Somehow that seems to have been totally ignored. There is a talk of double dip recession too which in my opinion is no more than a speculative term. It seems to be overhyped but of course, I am no economic expert.
If you are a long term investor in Indian Stock markets, this is the time you should be licking your lips. The simple logic is that in the long run, Indian markets are definitely going to go higher and are right now at very attractive valuations. In the near term, the uncertainty will persist, which means that there could be further downside. The NIFTY could even touch 4,700 levels but I think we really would bottom out there. Those levels are just unsustainable. The other way to look at it is that here you have an economy growing at 7-8% and the stock markets have been around the current levels since 2009. Sooner rather than later, markets are going to resume their uptrend. I must admit that India cannot go up in isolation in this extremely inter-connected world. However, we will see some global recovery within a quarter and India will outperform in that environment. Warren Buffett said today that he is already beginning to cherry pick in the US markets. I don’t say that he is the epitome of eternal right, but the man does have a track record of calling it right more often than others and often having a contrarian but successful view.
So if you have a little bit of risk appetite, August and September might probably be busy months for you as far as equity investments go. After that you can wait and watch the fun. Remember however, it is prudent to maintain a balanced portfolio which is not wholly reliant on equities. Also, do not commit all your equity allocation into the stock markets in one go but try to put them in intervals over the next couple of months.
Happy investing!
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