Highly fluctuating stock indices Lessons for retail investor – Part I By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

October 13, 2015 | Posted by bobbysrinivasan << back to blog

One day in future, you will want to build a portfolio of stocks from the Indian Sensex Market to put your hard earned money to work but didn’t know where to look for guidance and hence are these set of blogs; Look inside yourself, ask why you want to be in the Indian stock market. What are your expectations? How are you going to set your goals? Check whether you have a strong inclination to gamble? Do you make decisions with data support or by purely using scattered bits of information and opinion? These are the issues that will be discussed in these blogs between a student and his professor.

Student: Professor, I have read several books on equity analysis and they give you the feeling that with the knowledge available in the books you could use it to your advantage to create wealth for oneself. But you have been saying that the retail investor must be forewarned about the market behaviour. I need clarity and help. Will you explain to me as to how the price discovery in the stock market takes place?

Professor: Wait a minute. My answer will be long. You need to be patient in listening to me.

Student: Prof. go head. I am all ears.

Professor: First, bear in mind. Stock prices are driven by two fundamental factors. They are earnings growth and liquidity. While the first factor namely earnings growth can be obtained from the balance sheet, liquidity is not easily measurable except hearsay. Money flows into the stock market one day, flows out the next day. What can you do about it? Literally nothing. Every stock market which initially builds a balloon only to see it being blown away. This has happened repeatedly every couple of years. The last major one was in 2008-09 when the Sensex dropped from 21000 to 8000.

Student: Prof. Are you then saying that if I invest on the market, I should be prepared for it?

Professor: You bet. Recently Chinese market got ravaged and pilloried. It dropped 35-40% in a week’s time.

Student: You scare me. Are you telling the truth? How can such crashes happen?

Professor: I don’t blame you. The global markets are crazy. They can drop rapidly and before you protect your investment 20 to 30 of value would have disappeared.

Student: How then should I trade or invest?

Professor: Stock market is for a long time. If your timing is bad, you may have a big drop. If you had done your studies carefully there is every chance the market will recover and move up significantly offsetting all your paper losses.

Student: Tell me what are the signs of an upcoming market fiasco?

Professor: You need to patiently listen to my long sermon, are you ready for it?

Student: Yes, of course.

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