Can we predict market corrections?
Uncertainty and change are the only things permanent and common to all of us in this world.
Sridhar called me up slightly despondent last week. “The RBI has put out a warning of a bubble in the market. Apparently, equity prices have been rising relentlessly since the Sensex crossover to above 50,000 levels. Do you think the market is going to correct? I have quite a bit of money in the market”.
Now according to me, this rise can be attributed mainly to the money supply and foreign investments in the market. Although the improved economic prospects are contributing to this euphoria, it is clear that the impact is more due to the other two aspects. So I told him “Domestic investment in our stock markets is also high. Did you know that like you many people are entering the stock markets every month. A million demat accounts are being opened every month.”
“But, by historical standards Indian markets are highly overvalued. The ratio of Sensex share prices to company earnings is now over 34 as against below 20 historically. The Sensex has been bloated by the global influx of money because they see huge opportunity in India. But when they eventually exit the market, it will definitely lead to a correction.”
Accurate predictions can be forecast, but only in more controlled conditions where many possibilities and probabilities are presented and analyzed for impact. But predicting uncertain ‘shocks’ may be a challenge.
What history has taught us
Earlier ‘shocks’ (over the past few decades) which impacted the economy and therefore the markets and our investments are the Harshad Mehta Scam of 1992, the 2000 Tech Bubble crash, 2008 Global market crash and meltdown and most recently the Covid 19 crash of 2020.
Bear in mind, that in the latest one, a sharp correction happened over just 7–10 trading sessions. Perhaps we need to brace ourselves for a new normal … ‘shocks’ will occur every 8–10 years.
And with the magnitude of its impact globally, Covid 19 brought in a lock-down and change in ways of life as we knew it. Something that we had never experienced before. Therefore, more than predicting such an event, we need to look at the consequences and actions that we took…
Its impact on our personal lives and families will indeed be most ‘shocking’ to all of us and possibly something we had never imagined would happen.
Warren Buffet’s famous quote on being able to predict stock market movement (either rise or fall) is noteworthy -
“Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere.” — Warren Buffet
The moral of the story is that yes there will be cyclical falls and rises… some more than others. As long as Sridhar continues to stay invested and participate in the market both during the rise and the fall, he should have no trouble in the long term with his financial goals and therefore anticipated returns for his family’s safety.
“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Warren Buffet
Have you seen and navigated these cyclical rises and falls? What has been your experience with the ups and downs of the sensex? Are you objectively understanding and mitigating your risk? Leave your comments below or reach out to us at mimi.ps@sinhasi.com or on +91 96066 18000 to understand how we can help you maximize your investment goals.
