Not your emergency

On the morning of Monday, 2nd March, as the latest crisis in the Middle East dominated the news, Indian stock markets opened in a state of what can only be called theatrical distress. In pre-market trading, the Sensex was indicated to fall by over 2,700 points. By the time the closing bell rang that afternoon, the actual fall had been a fraction of that. If you had turned on your phone at nine in the morning, you might have concluded that your financial life was in serious trouble. If you had put it away and checked again at four in the afternoon, you would have wondered what all the fuss was about.

This pattern is entirely familiar by now. It has played out on every major geopolitical shock--every war, every election surprise, every pandemic headline--and yet we seem constitutionally unable to stop being startled by it. The question worth asking is not merely why markets overreact to bad news. The more useful question is: who, precisely, is doing the overreacting, and why?

The answer lies in a simple idea that is not discussed nearly enough: leveraged investors produce leveraged prices.

Think of what happens when you borrow money to invest in stocks or take a position in the futures and options market. You are no longer investing with patient capital. You are investing with capital that charges you rent by the day, and which can be forcibly returned to its owner if prices move against you. For such an investor, time is not an ally – it is a ticking clock. When bad news breaks at midnight, a leveraged trader cannot afford the luxury of reflection. They must act immediately, because every hour of delay could mean a larger loss or a margin call that wipes out their position entirely. Their panic is not irrational. Given their situation, it is the only logical response.

This is the market you are watching at 9:15 in the morning. It is not the market of long-term equity owners. It is the market of people who have borrowed to be there, whose investment horizon is measured in hours rather than years, and for whom an event like a Middle East flare-up is a genuine, immediate emergency. I have written before in this column about SEBI's research showing that 89 per cent of individual derivatives traders lose money. The leverage that drives those losses is the same leverage that drives pre-market carnage. When you watch the Sensex fall by 2,700 and start sweating, you are experiencing the emotional consequences of someone else's financial structure. The midday recovery is not the market "calming down," as television anchors often describe it. It is the real market reasserting itself over the borrowed-money market. As the day progresses and leveraged positions are forcibly closed or voluntarily unwound, the people who own actual businesses through their mutual funds, their SIPs, their long-held equity portfolios gradually set the price again. They are under no pressure to sell because no one is lending them money that needs to be returned. Their ownership of these businesses has not changed because a conflict has broken out thousands of kilometres away.

For the retail investor, the practical conclusion is straightforward, even if acting on it requires real discipline. The pre-market number provides information about the state of the derivatives and margin lending market. It is not a reliable signal about the value of the businesses you own. Checking it serves no purpose other than making you anxious. The businesses in your portfolio will open, operate, and close on the 2nd of March much as they did earlier. A war that was not in yesterday's price has entered today's price, and some adjustment is warranted. But a 2,700-point adjustment and a fraction of that adjustment cannot both be correct – and history consistently shows us which one is closer to the truth.

The morning panic belongs to leveraged investors. You need not borrow their emergency.

Also read: Panic and sudden meltdowns