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Tuesday, March 31, 2009

Musings on the Sensex - Financial Year 2008-2009

In the just concluded financial year (April 2008 - Mar 2009) the Sensex has been one of the worst performers among the global indices. In spite of the sharp rally during March '09, the Sensex finished about 35% below its April 1, 2008 level.

Many investors who invested in the stock market in 2004 and 2005 and enjoyed the bull market ride must be saying: 'Thank God this year is over, and let us hope the next year isn't this challenging'.

For investors who had never experienced a bear market before, the past year must have been a trial by fire. There are few stronger forces that smash one's ego and self-confidence than a full-tilt bear market. First your paper profits, and then your real money starts gurgling down the drain.

So what are some of the learnings from this gut-wrenching experience? Some of the old cliches - not necessarily about the stock market - come to mind:-

1. The higher you climb, the harder you fall - as in life and career, so in the market. Those who borrowed money, or used life-savings to enter the market during its peak must be feeling this the most.

One is reminded of the story of Icarus, who wanted to fly and put together wings with feathers and wax. He flew higher and higher till the sun's rays melted the wax and he fell to his death.

2. What goes up, must come down - the economy, the stock market, and most importantly, life itself goes through a series of ups and downs. It isn't the end of the world. To paraphrase an old song: 'you get yourself up, dust yourself down, and start all over again'.

3. You have to take the bitter with the sweet - for your own good health and for the health of your portfolio. Life experiences are some times happy and some times sad. Stock picks go up in value or they go down sharply. You have to accept it with equanimity.

4. Happiness is a state of mind. Just visit any slum in the metro cities in India (and I'm not specifically talking about Dharavi or 'Slum Dog Millionaire'). Don't just see the squalor all around. Look at the little children. They are smiling and laughing and joking and having a good time. We lose some money in a stock and have long faces. Hey! It's only money.

5. Never try to catch a falling knife. When a stock's price keeps going down one is tempted to buy at a lower price to average out the cost of buying at much higher prices earlier. Don't ever do it. A stock's price can always go down even more. Wait for the signals of a turn around before re-entering a stock.

If you keep reading my blog posts (I wrote two posts on what not to do in a bear market on Nov 10, '08 and Nov 23, '08), you will receive hints from time to time about where the Sensex is likely to go next.

Technical analysis is not a science, so I may get it wrong some times. But as a thumb rule, look at the 200 day EMA. If it is moving down and the Sensex is below it, the bear market isn't over. A sharp rally like we saw in Mar '09 may temporarily take the Sensex above its 200 day EMA (it hasn't done so yet). But it must close above for a few days till the 200 day EMA begins to flatten. That would be the first sign of a trend change.


Bala @ Balakrishnan said...

A very good post and tips to follow before investing in this bear market.

Bala @ Balakrishnan said...

A very good post and tips to follow before investing in this bear market.

Subhankar said...

Thanks, Bala.

Bear markets don't end all of a sudden. There is a process - which takes time. Investors who have lost money and are feeling depressed do not wake up one day and start buying. That is the message I was trying to convey.

Anonymous said...

thank you subhankarji for a very useful and analytical post.I hope all the long term small investors will follow the tips written in this blog post.I especially agree with you that one shoul not throw good money after bad money by averaging.Entire 2009 will give us good opportunities for picking up shares of good companies with good corporate governance.
with best wishes and regards,

Subhankar said...

Appreciate your feedback, Sujoy.

I've often said that long term investment is somewhat like batting in test cricket. You need a lot of discipline and patience, and judgement to decide which balls to play and which balls to leave. If you don't lose your wicket, the runs will come. Slowly but steadily. Much like building long term wealth.