October 27, 2008

In September 2007, a friend who worked in India's leading brokerage company was over enthusiastic about the rise of stock market. He was telling how in just one more year Sensex would reach 25000! By December 2007, Sensex was around 20000 and it seemed his prediction would be right on the mark. Around this time, a senior colleague said that Sensex has reached too high a level and correction would happen and it would settle around 18000 for sometime. Amid all this I felt like a fool to have sold off my entire stock holding!

It is October 2008 and I am a happy man who didn't burn his fingers in the stock market. In just 10 months, Sensex has crashed by 57%. This is not a unique phenomenon. This crash is like history repeating itself and frankly speaking I am not amazed. I was expecting it. The sad part is that again and again we fail to learn our lessons.

I am not a financial expert. But all it takes is some commonsense to understand that stock market is not run by bulls and bears. It is driven by emotions and greed. Human psychology and the desire to get rich quick are behind the unprecedented rise and fall of stock market. When the sensex is rising, no body expects it to fall as if it is into an infinite bull run defying all logic. And when it starts falling, no one expects it to run into a bottomless pit as there is always a support level to talk about.

I fail to understand why logic seldom gets its due in stock market. What logic justifies prices of stock getting double and triple in 6 months without any major change in business portfolio or macro economic environment of the companies? And what logic justifies astronomical rise of penny stocks? Every time there is an economic boom, there is a talk about story of India rising. Do macro economic fundamentals change in just 3-4 years? We talk about the great consuming class of India but we are yet to develop a sound manufacturing base. Consumption boom will never take off through agriculture and services unless there is a threshold level of manufacturing base.

Well, it is blasphemous to talk about logic, reasoning, and commonsense in stock market. Despite the current crash I don't expect investor behaviour to change. It will continue driven by emotions and greed. In the process, some will make money by the truck load and some will lose money by container load. Stock market will remain a zero sum game!