When investors, analysts and the media talk about equity markets, the word 'volatility' is often used in the wrong sense. We tend to use the word as if it means that the markets are dropping, whereas it should obviously be used in the sense of rapidly alternating ups and downs. The last one month has delivered that real volatility, and for many investors it's actually far more unsettling than a sharp drop would have been.
In the last one month, we have had some of the biggest one day rises and falls in the equity markets. In fact, if one looks at the point changes in the Sensex, then the biggest fall ever and the biggest rise ever are within a few days of each other. This is great material for the headline writers, and in fact, every single day they come up with some reason or the other as to why the equity markets have done whatever they have done. After all, it would not be the done thing to come clean and say that the markets went up but there was no real reason for them to do so.
However, we investors are forced to scratch our heads and wonder every day as to what exactly is happening. Generally speaking, we are used to the idea that the movements of the stock markets are a verdict of the markets as to the prospects of businesses, sectors and the economy. The markets' verdict is often more trustable than just the talking head experts. The reason is that stock prices encapsulate a prediction of the future that is derived from the actions of a large group of people who have actual skin in the game. As such, they are generally more trustable than mere words of experts because in spouting words, there is no cost to being wrong. Whereas when you are yourself an investor, then there is real financial cost to being wrong.
This obviously does not mean that the markets are never wrong - they often are. However, it does mean that market participants' actions genuinely reflect their opinions. So what are the markets telling us at this point? They're saying an entirely different thing every few days. As I write this column, they have been rising for a number of days but that's something that could change by the time you read it. In fact, even in the past whenever there has been a long, sustained crash, there have been many false dawns on the way. Typically, there has been one, sometimes two sharp upticks and then further sharp declines take place.
Given the unique and global nature of the underlying cause of this crash, that may mean nothing at all, but it does put the current little bump in context. The correct conclusion to draw at this point is that no conclusion can be drawn. It's entirely possible that there will be no real end to the underlying crisis - just a long and painful tapering off over months and years. At this point, everything is up in the air.
What savers must not do is to mistake anything for a pattern and take actions with lasting effects. I got an email from someone who sold off a lot of investments a while back (something I'll speak about later) and now wants to utilise the proceeds to pay off a good part of a housing loan. My friend's instinct is justifiable, as per his logic. He feels uncertain times are coming, so he should reduce liabilities as far as possible.
From a broad standpoint, this is a good instinct. However, in times of real uncertainty, a bird in hand is worth dozens in the bush. Keep as much money as possible in your possession in an easily liquidated form. The lenders can look after themselves. I advised him strongly that at this juncture it's better to pay some interest for a few months rather than reduce the usable funds in your pocket. Sometimes, the normal rules do not apply.