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Stop listening! Sleep easy! - Views on News from Equitymaster
 
 
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  • Jun 7, 2005

    Stop listening! Sleep easy!

    "Sensex to reach 7,000 by June end!"
    "Sensex to breach the 8,000 mark post monsoon!"
    "Next Sensex target is 9,000!"

    Wait! Don't get excited! This is not what we are predicting for the Sensex in the future. But, in these times when the Indian equities have regained their 'lost' strength and have reached higher levels, there might be similar reports doing the rounds predicting the benchmark index to breach its 'all-time highs' again. Now, what should a retail investor do if not give in to the 'strong' arguments that follow such predictions? Here's a way out. Stop listening! Do not let a misguided step turn your investment venture into a speculative misadventure.

    The Mr. Market example of the legendary investor, Benjamin Graham, perfectly suits the current situation in the Indian equity markets. For the first timers, through this parable, Graham asks investors to imagine a non-existing person called Mr. Market who is your (investor's) partner in a private business. He appears daily and names a price (stock quotation) at which he would either buy your interest or sell you his. Now, despite the fact that both Mr. Market and you have stable business interests, his quotations are rarely so. At times, he falls so ecstatic that he sees only the favourable factors affecting business. And this is the time he would name a very high buy-sell price because he fears that if he does not quote such a high price, you would buy his interest in the enterprise and rob him of imminent gains.

    And then there are times when this very Mr. Market is so depressed that he sees nothing but trouble ahead for both business and the world. These are the occasions when he would name a very low price, as he is terrified that if he does not do so, you would burden him (sell him) with your interest in the business.

    What does this parable mean for you, the investor? It indicates that you should look at market fluctuations in terms of the Mr. Market example. Make market fluctuations as your friend rather then your enemy. This means that you should neither give in to temptations that rising markets bring with them (as they are currently) nor should you think of doom when the markets are falling incessantly (see what happened a couple of months back).

    Pick a stock that matches your risk-return profile and not the one of your broker and research well about the company's history, its business model and factors that are likely to affect its future performance. Also, have a long-term (2 to 3 years) investment horizon. Following these mantras will not only help you realise adequate returns on your investments, they will also help you sleep easy!

     

     

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