Digitising thoughts

and getting immortal on the fly

Crystal gazing the Indian stock markets

Posted by Sathyamurthy www.sathyamurthy.com on June 19, 2006

Indian stock market is currently in the classic…”kill the bull, trap the bear” phase. Values of many stocks have come down 50-75+% from May 1, 2006. Such a fall in a matter of about a month is unprecedented and various reasons suggest that it is an orchestered fall. Such a game is played to make the weak exit and the strong enter. Stocks have changed hands for sure. Hence lends more credence to the fact that bottom is somewhere near.
Ok, at such times, we lose rationality due to panic/fear but to think of it…money is a mind game not emotional or psychological. What is a share…it is after all a part ownership of the company. And if a company worth Rs100 crore is available at Rs20 crore…how long can panic withhold genuine investors, who know that ups and downs are part of market and market never dies. Suppose if BHEL is made available to you at Rs80…then won’t you be inclined to sell your house and buy as much as you want as you know for sure that in the next cycle of bulls, you are sure to at least sell at 200+, when rationality returns. Then maybe you can move to a bigger better house.
Well, the operator knows that and therefore he never brings down prices to that level wherein fear fades out and people are willing to take increased bets. It’s like jumping from first floor of a building for a prize…out of 100 people, 90 may agree. From third floor, maybe 20-25 may agree (factoring in a fracture or two) and from fifth floor…maybe 1-2 may undertake suicidal attempt. Values are down to Sensex 5000 levels in many cases and match prices prevailing in 2003. Well, in some cases, to levels when Sensex was sub-3000.
Let us tell you the case of Mansukh bhai. When his favourite stock was Rs100. He had clever information that it will come down to 50 and so he waited patiently to buy. Luck favoured him and price did come down to 50 as Sensex plummeted from 12674 to sub-9000. But at that time there was panic all over and sentiment was bruised. There were talks of 6000-7000 in Sensex very soon.
Greed got better of him and he immediately lowered his buy target to Rs30. So money lying idle
waiting to be deployed got pushed further down. The stock reacted from 50 to 62…Mansukh thought it was a technical reaction and how true he was…the stock again tumbled to 46 and Mansukh was cheerful that now his price of Rs30 was but within reach. He had dreams of selling the stock again at a future point of time at 100+ (Note he was sure that 100+ will be back again at a point of time). But from 46, market again bounced and the stock made it to 58 before tumbling again to 50. Mansukh bhai was sure that his (un)reliable sources cannot be wrong and market has to go to 6000 and hence price of 30 has to come. So he still did not deploy the money. The stock then rose to 68 from 50 in a matter of 15 days. Mansukh bhai got a little tensed and put some money at 68 but at that point profit booking came and stock tumbled back to 58 where mansukh bhai sold off at a loss, again feeling that 30 was coming. But in another 10 days stock was 75 again and Mansukh had no idea what to do. From 50 to 75, 50% gain and just because of his oversmartness and lack of discipline coupled with fear and greed, he let opportunity slip out of his hand and now he was suffering a mental block to buy at 75+.
Moral: Money could not be deployed at lower levels though the most popular school of thought says, “buy low sell high”.
OR waiting for the elusive bottom. As explained above, at a certain price, demand overtakes supply and prices therefore rise. Every share has an intrinsic value and you cannot keep investors forever at bay. Sentiment changes in favour in no time hence the best time to buy is when everybody is selling. Time tested theory. Bears make bargain hunting possible and at a point of time all bears turn to bull.
Veena behn, a widow, had invested Rs70,000 of her hard earnings in the same stock at 104 in March as her nephew was a fund manager and he had informed her that within a year the stock would cross 250+ as some corporate development was expected and net profit was expected to improve sharply. In good faith, Veena invested but in three months flat, she saw price tumbling to 85, 75, 60, 52, 46…at every fall she would call the nephew and ask what to do…she at times cursed him also. The nephew knew what was going on in the market and that things would be normal in a few months and asked her to hold on with patience.
But she was not in peace and was having sleepless nights as her Gujarati neighbours constantly kept talking of Rs30 for her stock and how market was in a bear phase. Fear of further downfall was in her mind and like everyone else…she wanted her stock 1) to fly immediately after buying and 2) never go down below the buy price. It’s like asking for too much, isn’t it?
But she knew that she had to believe in her nephew more than anybody else and when in next 4-6 months prices climbed back to 104, she sold off without asking the nephew thinking “saved” without understanding the ploy that getting to exit at buy price means that stock is headed higher. And she will never buy again even at 125.
Lalwani was smarter. He had bought the same stock at 100 but he did not expect a correction more than 75. However, when stock breached 75 and was at 52, he broke his fixed deposit and bought more quantity. His logic was when he saw value at 100, then why should he lose opportunity at 50. He was willing to wait with faith and patience. He had done his homework and was sure company fundamentals were poised to take it to 150-200+ in 1-2 years and for a 200-300% returns in such uncertain times…the risk was worth it (after all, equity means risk).
He was sure…aakhir free mien to stock nahi dega market and bottom has to be somewhere. Even if at 30, he was willing to wait. Today, in less than 2 months of turmoil, his stock is trading at his average price and all agonies have been buried. In 8 months, he sold the stock at 160. Smile back on the face.
But Govindji was unlucky…he got panicky and sold his stock bought at 85 at 48 as he wanted to benefit from the fall and buy back at 30. He forgot that market was smarter. Finally, he had 2 choices, either to buy back at 75 or let go the stock. As human psychology is, he did not have the courage to buy and was cursing himself for acting on unreliable information and impulse.
We had earlier sent the price history of Fortune Info showing how a stock jumps from 22 to 52, tumbles down to 25 again and shoots to 113. All within 3 months. Similarly of Tyche Peripherals, how after buy reports, it fell from 26 to 8 and then jumped to 52…just in 3 months. History has many such evidences in store.
What you should understand from the above is that…
–>If you have the money, buy on declines with a 1-2 year horizon and you may well get 100-200% returns. Avoid fear and greed and start buying in phases. Do not wait for the elusive bottom.
–>If you are stuck up at higher levels and the stock is strong fundamentally, hold on to the stock with faith and patience. Not only your cost price will come back but profit will also be made. Do not trade on your investment. And for God’s sake, do not sell and exit the market…that is what operators want.
If possible, arrange for some more money and average lower or enter some new stock to take advantage when market bounces back.
*There is nothing wrong with the markets and bull run is definitely not over. Maybe the bottom has been made or maybe it is yet to be made. But by June-July, this mayhem will end for sure as you cannot keep a spring down for long. Powerful people who have lost out will come back with a vengeance…remember you are least affected because of your limited investment size (very small stake as compared to them) and these people have the power and lobby to turn the markets. And they will. They will rescue you to rescue themselves.
We expect 11000 to be tested once by July and 12500-13000 anytime from August to October and 16000+ anytime between December-March. Buy with these levels in mind. Even if things do not move as fast as expected…16000 is very much likely latest by December 2007. At this level, your cost+profit is guaranteed.
Further, the correction has removed many excesses from the system, weak players have exited and expectations have come down. Now people are worried about saving capital…a month back they wanted 10-15% gains every 2 days whereas prudent investment philosophy says to expect 15-20% annual returns from stock market. However, many a trader have paid price for their greed and understand now why people work hard to make a living and not enjoy life by playing the markets. It was never easy and it is never going to be. A strategic and informed decision followed by a disciplined execution can alone make you laugh your way to the bank.
For the market to go back in confirmed bull mode, it will take at least 1-2 months. June-July should be months of volatility, with ups and downs creating greed, panic and fear. Rise will be treated with skepticism and disbelief and invite selling and profit booking…falls will be seen as opportunity by many to short sell and also raise hopes of buying lower…this will be followed by consolidation of the market and then a gradual rise which will be accompanied by hesitancy and disbelief again, this time by bulls and bears both…finally when it dawns that market has changed course, money waiting on the sidelines will enter (albeit at much higher levels). You must only be a buyer on declines or hold on to shares…not at all be a seller.
There is nothing wrong with the India story. Our sources say FIIs are gung-ho on India and lot of money is waiting to be deployed. Mutual funds are also at comfort. All MRH (main reh gaya) people unable to benefit from previous rally are just waiting to pump money and hedge funds who have been bruised are equally impatient to buy. So let’s see who bells the cat first….
Digest the pain. You have lived almost 90% of it. Bear 10% more with closed eyes. Do not look much at markets for 1-2 months (i.e. if you cannot buy lower) and you will see things have changed in your favour without doing anything…sometimes time heals faster and is better than any medicine or measure.
Published with thanks to:
Giving market advises for Profitability @ High Probability
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