Saturday, October 27, 2007

What goes up, up and further up..... has to be suspended for one hour when it comes down....

I have always thought, a certain amount of stoicism about the markets is a healthy habit to develop. Recently, when the Indian Sensex fell intra-day around 1700 points hitting what they call a 10% lower-circuit, SEBI suspended trading for an hour, probably to cool it off. (For novices like me, I think the phrase 10% lower circuit roughly means that Sensex fell 10% in a single session). I wonder why they didn't do such a restrictive thing when the markets went up, up and up too ? Going up is okay, coming down is not, is it ? Or they should have allowed the free fall under gravity, come what may, so that the market finds its own realistic evaluation bottoms, whatever that might be and rest comfortably on the sofa. If indeed it is overvalued, then a prick of the balloon might actually have been helpful in knowing the solid stuff within. Looks like: It's somehow okay for the market to pick a large number of points spread over a week or so, although such pace is far different from earlier acceleration levels and not reflect fundamental strengths .... but it's somehow not okay when it falls. :). It's okay to make unusual gains when they are spread over a week but not okay to lose such gains on a single day however unusual the gains may have been.

I wonder how the free market enthusiasts would like to look at this : Is this financial systems regulation or interfering with free markets ? Another blog of Ramnath, Free Markets India, tries to keep a log of the various forces pulling and pushing, for or against the pursuit of free markets. I can understand corporate or political lobbying for exclusive economic privileges can be categorised as a pull or a push, but i think it's difficult to categorize regulatory actions. It's tough to draw a line between what is healthy regulation, developing robust financial systems, putting market infrastructure in place etc and what is just ad-hoc damage control. That day, even FM intervened to make a statement, which I thought was a little extra. Of course, I haven't researched to write this post, but I wonder if there is such a thing called breaking a 10% higher circuit, in the SEBI regulations, just like the 10% lower circuit. Asked an economics friend about whether such a thing is of importance to the free markets discussion. He said, in real life, there are a lot of constraints to free markets and these constraints are to be handled first in the pursuit of free markets. I might have to read up Raghuram Rajan to understand what these are.

I tend to subscribe more to the long term value addition approach. I think if one can:
park and wait in good (intrisically value adding) stocks/funds, stoically,
remember a bit of Shankara's references to Economics in Verse 30 of Bhaja Govindam, :) :) ,
be not worried about the everyday ups and downs,
keep cool without looking for reassurance from the FM to heave a sigh of relief,
sit on the eggs and wait for them to hatch for five or ten years,
then equity has the scope to fetch far better returns than other forms of investment in an equivalent period. Of course, this doesnt apply if one is sitting on a donkey fund or a dead stock or special disasters. Otherwise, A little peep, now and then, to just see the eggs are fine should do.

Quite possible, I am over-simplifying here what the Finance guys read across a few semesters. I have seen the non-tech guys trying to figure out a simplistic understanding of the tech abracadabra, and succeed in achieving a functional understanding and the non-finance guys try to do the same thing to finance subjects. When I was first unsuspectingly "exposed" to the verbal weapons called Debit and Credit, when the duo mockingly stared at me from the blackboard, Drawing a T-shaped organism to tally numbers used to cause nightmares and make me sit up and draw the Holy Cross on my chest. I used to cheer myself up with the Lakshmi Ashtothram, try to ignore those two words as mere hallucinations and think of it as just Inflow and Outflow. As if water flowing into a tank would be Debit and water flowing out of the tap, then, must be certainly Credit. Or is it the reverse ? :) . Well, depends on whether we are talking about the tank or about the bucket. Closing the tap and measuring the water must be.... wait, is it Balance Sheet ?. Whateva. Something is better than nothing. Of course, Everything is even better, if you can handle it. There is no powerful substitute to in-depth research into a subject.

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Disclaimer: Views expressed in this blog are the blogger's personal opinions and made in his individual capacity, sometimes have a story-type approach, mixing facts with imagination and should not be construed as arising from a professional position or a counselling intention.