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Managing the Pain

The pain of investors is enormous. People have lost a lot of money and not only are the losses continuing, but it's clear to me that they are going to continue for a while

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The pain of investors is enormous. People have lost a lot of money and not only are the losses continuing, but it's clear to me that they are going to continue for a while. What is worse is that the boom and the hype around it evolved in such a way that the worst pain is faced by those who are least prepared for it.

The worst real losses are those of investors who got attracted to the stock markets in the last four or five months. Typically, these people have made a series of bad choices. Instead of investing steadily, they have put in large chunks of money at one go. Their mutual fund investments are in untested new funds and their stock investments are in rumour-of-the-day type of stocks that were being pushed by brokers till a few days back. The more recklessly adventurous have already lost large chunks of their investments to repeated margin calls from brokers and lenders.

Of course, the question that everyone is asking is when will the markets turn upwards and resume what we've come to believe is their normal course. After all, as the logic goes, there is nothing wrong with fundamentals. Firstly, the fundamentals of Indian corporates' financial future are somewhat less rosy than the general hype would have us believe. The rising cost of money and distortions produced by the huge liquidity glut are a serious issue.

Even more important (at least for the time being) is the fact that the markets' short-term movements have almost nothing to do with fundamentals and almost everything to do with investor psychology and behaviour. Four weeks ago, when large cap indices like the Sensex used to leap up by three or four or even five per cent in a matter of hours, that had nothing to do with fundamentals.

There was a huge optimism in the air, a kind of madness that made otherwise sane people want to believe that it could go on and on. Today, when the same indices collapse by the same huge percentages in hours, then it is as much psychology and behavioural factors at play as they were a month ago.

Unfortunately, this means that there is no formula for predicting when the decline will end. It won't end when the Sensex PE will be 20 or 17 or this or that. Instead, it will end when people will feel like buying again. This could be when the Sesnex is at 8000, or 6000, or 5000 or 4000. I don't know what the Sensex level will be when it starts rising again, but in terms of time, I have a feeling that it is likelier to be measured in months rather than days or weeks. The cycle of optimism, alarm, fear, pessimism and then optimism again will have to be gone through. No matter what the numbers say, people's feelings take time to change.

The coming months are a great long-term buying opportunity if you avoid making the wrong choices. So what is to be done? The answer is the same as it always is. In the words of a very funny TV ad, “Lage raho”. You will do your financial health a big favour by steadily investing in a small number of well-chosen stocks or mutual funds.

Remember how, just the other day, you were thinking of the enormous amount of money you could have made had you been sensible enough to buy when the markets were down in the dumps? Cheer up, here comes that opportunity again.