The Sensex is scaling heights it has never witnessed earlier. Is it time to for investors to drive down this path a little more cautiously?
31-Oct-2006 •Dhirendra Kumar
Many years ago, when I was barely out of college, I knew a teenager named Bhola who worked as an assistant at a roadside tyre puncture repair shop. I didn't have much in common with him so it was interesting to have a chat with him whenever I would go to that shop to get my scooter's tyres patched up. And since the worn-out rubber of my second-hand scooter seemed to developed holes almost spontaneously, I used to meet him quite often.
One day, as he fished around inside my scooter's rear tyre for the nail that had just slashed the tube to ribbons, Bhola told me that the reason people got punctures was that they didn't know how to drive. He said that all one had to do was to look at the road carefully while driving and then swerve whenever one spotted a nail. Now, I was such an inexperienced driver at the time that for a moment I actually took this statement at face value and started wondering that why, in fact, did everyone not do this.
And then realisation dawned. Actually, Bhola didn't have a clue what he was talking about. Not only had he never driven a scooter or a car, he had probably never even ridden any vehicle except a bus. He really had no idea at all that it was humanly impossible to do what he was describing. Bhola had observed activities that he had never performed. He had then formed a theory and was now dispensing supposedly practical advice based on that theory. It was almost as if he was preparing for a career in consulting.
But if you think about it, all of us who have anything to do with equity investing, either
professionally or as investors, are Bholas today. We've never been in the situation that we are now, and we all think that we know what to do based on some theory that we have. Consider the situation objectively. India's economy is growing like it has never done. There is an optimism in the air the like of which none of us have ever experienced. The stock market is at an all time high and this all time high is not a trivial one. The BSE Sensex is now is almost three hundred per cent higher than the levels at which it has spent a majority of the last decade. Moreover, not only is it at such a high, it has gotten there through a journey of ups and downs that has a most solid, believable and sustainable ring to it. A huge mass of people have made an enormous amount of money through equity investing over the last four years. On the other hand, some of the dark clouds that are gathering are also the kind that we have never seen.
In balance, this seems like a good time to make one's investments grow but I think we should all sit down and admit that we are in a profoundly Bhola-like situation. We are driving down a strange and wonderful road where we've never been before and it seems to make more sense to stay focused on the horizon than to try and look for nails on the road. You see, since we are anyway going too fast to be able to swerve in time to avoid the nail, it's probably better to cover as much distance as we can before the inevitable puncture happens.