May 16, 2006|
Markets: It's 'consensus' time again!
The 'meltdown' witnessed in the Indian equity markets yesterday again reinforces the fact that the world has become a 'flatter' place to live, work and make money in. The 'crash' or the 'healthy correction', as was witnessed yesterday, followed what happened in other global equity markets. This reversal was led by apprehension about a further rise in the US interest rates, which could consequently effect global economic growth and demand for commodities (as seen from the meltdown in metal stocks). Call it by the name of 'crash' or 'healthy correction', or anything else as you may, what has emerged once again is that participants continue to resort to the 'consensus' way of doing things. Someone says-"it is a healthy correction and investors should practice 'value' buying", and others simply follow suit!
When the markets are buoyant and everything that you pick up rises in value in a short span of time, participants (investors and speculators) tend to form a consensus that the euphoria will not end soon. This is what was seen when the Sensex was nearing the 12,000 levels. All had formed the view that the next target will be 14,000. And all have been proved wrong again, at least for the time being!
More importantly, small investors, who (usually) follow such a consensus approach to investing, are the first to fall prey. Now, when the markets have reacted sharply to global events, there has emerged a consensus that it is time to 'value buy' into stocks, from whatever sector it may be, of whatever company it may be! But why?
Investors (not speculators) need to ingrain in their minds what the legendary investment guru, Benjamin Graham once said, '...in the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion (consensus). However, in the long-term, the market is a 'weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism (fundamentals).'
What we have tried to indicate time and again through the example of Mr. Market is that investors should look at market fluctuations in terms of the Mr. Market example. They should make these fluctuations as their friend rather then their enemy. This means that they should neither give in to temptations that rising markets bring with them nor should they think of doom when the markets are falling incessantly.
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