Stock market price movements – I By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

August 30, 2016 | Posted by bobbysrinivasan << back to blog

After dropping to 22000, the Indian Sensex has bounced back smartly to reach the28000 in the last one year or so what made the difference. Why in the first place the Sensex which peaked 30000 decided to drop to 22000 before the bottom was established. This is a conversation about the stock market price movement between a Professor and his Student.

Student: Professor, during these two years in the campus I have seen the prices of stock go up, correct 2 to 4% in a single day and continue their journey. Why does this take place? Is this information driven, sentiment driven or panic driven.

Professor: I am glad you noticed the trend. This has always been the case in the global financial market. For example in 1989, the US Dow Jones dropped 508 points from 2200 to 1700 on a Tuesday (often referred to as black Tuesday). Those panicked and left the market will be wondering as to how this index is currently at 18000. For that matter which former President Ronald Reagan occupied his office the Dow Jones was only 740. What a difference?

Student: Thank you. I am specifically looking for reasons. We take courses in equity analysis. Portfolio management but the volatility topic did not come up.

Professor: This is a million dollar question. I will try to answer the question. Recently when the Brexit result was announced, panic overlook the global markets and the market crashed temporarily nearly wiping out US dollar 3 trillion. Later it bounced back. In this instance, investors showed to the world that they enjoy panicking together. The weak at heart person runs away from the market claiming that he cannot handle the heat. Strong hearted person believes that nothing will last long. He sees it as a buying opportunity. Warren Buffett belongs to this group. At the time panic, the asset value becomes heavily underpriced. The wise investor knows that and ends up buying his favorite stocks at a discounted price. Similarly when China announced 1.9% devaluation of their currency last year our Sensex dropped 1700 points and the mighty Dow Jones index dropped 1000 points. When the panic receded the market bounced back beautifully.

Student: Professor, tell why any investor should panic. He knows that the economy is doing well and that there are no major disruptions.

Professor: Panic is a very important yet undesirable human trait. Many investors believe that stock market is a gambling casino. The smart gambler takes home other people’s money. Believing this, you also believe that you are different. You tell yourself, I will take the volatility on my stride and I will not cop out when the panic hits the market. The mind gets obsessed with invested money and its reduction in value. This obsession blocks your mind from functioning. While you believe and say that what goes down must come up. Having said that your mind says, “Your belief may not be right this time”. To buy peace you rush to sell in a hurry taking a big beating in value. Any conversation with retail investor has always revealed this. Before they buy stocks they need a course in human psychology. They tend to prove the maxim “suckers are born every minute”. Listen I have to go.

Student: Yes Professor. I will catch up with you when you are free.

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