Its been a pretty long time since we saw a move in the markets where dogs, cats and bananas are all rallying together, may with incredible speed that seems to suggest that even the gravitational force of Jupiter may not be enough to reign it in. For guys who have shifted their focus to selective trading / investments, this is a time where holding the nerves calm is a tough ask.
After all, even taking into account the strong showing of BJP in the polls, Nifty if up by just 8% for the month. On the other hand, stocks have done wonders. But how true is that fact?
A few days ago I analyzed the performance of stocks and came up with the following static
While its easy to assume that stocks have rallied across the board, the above data tells us that not everything has gone bonkers. Many stocks have horror of horrors under-performed even as both Mid and Small Cap indices have beaten the large cap indices by a pretty good margin.
What the left out feeling does is make us react in ways we believe we are trained not to react. In other words, while we assume that our thought process is pretty different from the herd, we actually start thinking and behaving like the herd. It takes a lot of effort (mentally speaking) to be able to remain calm and continue to follow the process we have laid out even as the rest of the market seems to suggest that we are barking at the wrong tree.
In 1999, when the tech boom was under-way in US, the one guy who decided to skip investing into any stock was Warren Buffett. As stocks continued to rally, it was seemingly obvious that he may have started to lose touch with the market. But 2000 showed why his famous quote (which he said in Feb 2008) makes so much sense.
But then again, a guy who one can contrast Buffett would be George Soros who has actually delivered a much strong return for his investors. While Buffett chose not to participate in bubbles and instead arguing for value based investing, Soros has once in the past said that while Gold seemed to be in bubble territory, he would be happy to be long as long as the trend was strong. But then again, Soros being Soros was able to get out of Gold well before it started to tank against say John Paulson who made money on the way up only to let go of a lot on the way down.
The reason I brought in Buffett and Soros was to show the diametrically different ways they dwelt with a situation. Both have prospered due to the fact that they both are good at what they do and rarely do go outside their area of competence (think about Soros buying Good Companies or Buffett shorting Euro / Pound).
A interesting adage in the markets goes like this
Bulls Make Money, Bears Make Money, Pigs Get Slaughtered
The retail participant is generally seen as the Pigs / Sheep as the probability of them making money on the long term is pretty low. But that doesn’t dissuade anyone since they believe they are better prepared than the guys who lose the race. Unfortunately, rarely does it turn out to be true (and this despite many of them spending a fortune in attending courses on how to make money in markets, buying tips / newsletters among others).
As Ed Seykota once said
Win or lose, everybody gets what they want out of the market
If you are feeling left out in the current rally, step back for a moment and think about whether you have a plan, a process to ensure that you can make it out if the cows start to come home (and many eventually will). Without a plan, you are a duck out of water – matter of time before you are shot and curried.
Do remember, markets were we were born and shall remain after we are dead, but if we mess us in markets, it can screw up a lot more things in life than just finances.