Mortgaging the future – don’t be sentimental

This is regarding “Mortgaging the future” (FE 01.10.08). It a timely piece of advise to the general investors. Wall Street crisis has shown the cracks in the “great” Wall.    

What has happened in USA and Europe is likely to cause ripples and waves in the Indian markets as well.

I would like to share some of the popular perceptions (about which I read while studying for my Business Management course).

“Market Sentiment” is an oft quoted jargon which is judged to be the culprit when things don’t go as per popular expectations. Instead of talking about fundamentals of a company or market,the lay man generally talks about market sentiment.Most of the time he does not see the relation-ship between market movements and the fundamentals of a company.There is no logic. When he expects the market to go up because of certain factors, it goes the opposite way. There is apparently no relation between logic and market movement.It is also commonly observed that some companies / economies have excellent prospects, but very few buyers.On the other hand some companies enjoy highly unjustified prices during such times.Thus, there are two components of behaviour: “hype” and “suspense”.

Another commonly abused phrase is what is called “herd mentality”,which begins with a select few investors jacking up prices in a certain direction and then the others seeing the movement,jumping in blindly. Because of “fear” and “greed” factors which dominate the market,the select few traders take the prices to illogical lengths regardless of the fundamentals of a stock. We have often witnessed situations where some stocks enjoy astronomical heights while others remain mostly oblivious or undervalued.The popularity of a stock attracts hordes of investors-that is the “greed” component.When there is a downward pressure in the price movement, investors start selling “fearing” further losses.

What the common investor needs is to learn to buy on anticipation of news and to sell on actual news.Quite a few so called “savvy” players,do it the other way i.e. buy the rumour and sell the news!

Reams have been written on and several quite educative research papers have been published on the subject of “market sentiment”.It is sufficient for a lay man to understand that ,there are no set rules governing the behaviour of markets. In fact,markets have their own rules.With so many fingers in the entire pie by way of players present in the market, it is an accepted and proven fact that it is hard to predict its direction.Yes,tools like “fundamental analysis” and “technical analysis”are there, but they,as past experience tells us,have never brought in proven results. If they could predict accurate market behavior , then the uncertainty factor will be lost.It has been established that there is no conclusive evidence regarding any normal market behavior.On the contrary if there is some evidence to support that market does not follow set principles and quite often its behavior is ” irrational”.

We in India have to develop the nack of taking market news with a fistfull of of salt (“Discretion is the better part of valour”,they say ! ).Media plays an important role in market sentiments.I am reminded of a January 2006 research report published by Federal Reserve Bank of St. Louis which said: “Optimistic and pessimistic language is predictive of firm performance in future quarters. We interpret the evidence to suggest that managers use optimistic and pessimistic language in earnings press releases to provide information about expected future firm performance to the market. We find a significant market response to the levels and unexpected amounts of optimistic and pessimistic language in earnings press releases.” So let us be wary of what is written in the media.

Another report ( San Francisco Federal Reserve Board Report of 2004) stated: “The perceptions of consumers may be influenced not only by the content of the news stories they come across but also by the way the media cover the economy-specifically, the tone reflects the language used, and the volume reflects the number of articles about the economy.These results suggest that consumers pay attention to the media’s reporting of the economy and that perhaps the tone and the volume of reporting affect consumers’ perceptions above and beyond the facts and opinions being reported.” Hence I feel it is the moral duty of the media barons to educate the common investor and not lead him up the garden path resulting in spoiling his present by “mortgaging”,as you call it, his future.Very often he is carried away with the popular Wall Street phrase “the trend is your friend”.This is always not the case.

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