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A Certain Uncertainty

If one looks at the all the good things that can happen in this country, then high optimism is justifiable. But aren't too many people assuming that all good things will happen and nothing bad will?

A few days ago, the bellwether Infosys stock sank by about five per cent in a day's trading. In fact it had sunk by almost that much within the first few minutes of trading. The reason, clearly, was that the company's quarterly results, which had come out the previous day, matched expectations exactly. Therefore, went the logic, they were already factored into the stock price. This of course, is no logic because had this really been the case then the stock price would have neither gone up nor gone down, at least not substantially. This company, which in many ways is emblematic of the new Indian economy, surely has to be the most well-researched and well-understood of all businesses that stock analysts try to analyse. This should be the one company where there should never be any surprises at all, especially given the high standards of transparency that its management maintains.

While this stock can be volatile due to reasons internal to the market's trading dynamics, no one in the stock market should be surprised by its results, more so when the results exactly matched the very well-publicised 'consensus' of analysts. Yet, the very fact that the stock sank that day proves, beyond doubt, that the market, despite many players', protestations to the contrary, was in fact surprised by the results.

Quite clearly, many people expected CEO Nandan Nilekani to pull a rabbit out of his hat and were secretly hoping for something even better than the excellent 31 per cent growth that matched expectations. Now I don't know whether this is normal behaviour or not, but I'm certainly alarmed by it.

Is the Sensex reaching out towards 10,000 because that's the figure that is justifiable by what can sanely be expected or are investors hoping that the Indian economy, as a whole, will pull a rabbit (or many rabbits, one after an another) out if it's hat. If one looks at the all the good things that can happen in this country, then high optimism is justifiable. But aren't too many people assuming that all good things will happen and nothing bad will?

Growth rates will be maintained, oil prices will not rise sharply, no matter what happens at the political level, government policies will stay business-friendly, no event risk will be realised. It's going to be a smooth journey along one long, well-paved, straight road to enormous prosperity. The future is not only wonderful, it holds no surprises. Is that what the stock markets are discounting today?

To paraphrase a memorable movie dialogue, the future is always surprising, that's why it's the future. After all, can you honestly say that what is happening now is not a surprise? When the market sank seemingly without a bottom in sight in May 2003, did you expect to land up where you are today. Tell me, when you look at the Indian stock market's history for the last couple of decades, which part of it could have been predicted two or three years in advance?

Mind you, I'm not pessimistic about investors being able to make money in the future, even in the near future. Far from it. I honestly think that things are going to get better and better. However, I consider it beyond doubt that there will be both ups and downs, and some of the downs will be far more severe than the volatility we've seen so far.

If you've discounted a perfect future into your investments, you could be heavily overbought.