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Thursday, January 28, 2010

Investors may find something fishy about this post

I was pondering about the current uncertain state of the stock market, when I remembered the story of the three fishes that was part of my school curriculum many many moons ago.

There were several ponds within a large tract of land owned by a wealthy land-owner. In one of the ponds lived three large fishes. One was called 'Anagatavidhata'. The second was called 'Pratyutpanyamatitwa' and the third was called 'Jadvabishya'.

Not being literate in the Sanskrit language at that early age, the names sounded rather complicated and unnecessarily long for fishes. The purpose of such strange-sounding names may become clear from the story.

One day, some fishermen were standing near the pond where the three fishes lived and were chit-chatting about the impending wedding of the landowner's daughter. One said: The wedding will surely include a huge feast. Another said: If we can catch some big fishes alive, the landowner will surely give us a nice tip.

Over-hearing such talk, the three fishes went into a huddle to decide the next course of action. Anagatavidhata didn't want to take any chances and decided to escape into the neighbouring pond, which was much larger and deeper and would be easier to hide in. He immediately started to burrow in the mud to dig a hole into the next pond.

Pratyutpanyamatitwa would have none of it. He knew that the wedding was still a couple of months away, so there was no immediate danger of getting caught. Jadvabishya believed that it was the destiny of all fishes to get caught and slaughtered, so why get all worked up about it?

Two months later, the fishermen came with a huge net and cast it into the pond and caught all the fishes in it. Anagatavidhata had already escaped into the neighbouring pond and was saved.

Pratyutpanyamatitwa decided to play dead and did not struggle at all when the net was pulled in. The fishermen took all the fishes that had died struggling to get out of the net, and threw them back into the pond.

Pratyutpanyamatitwa also got thrown back in with the dead fishes and lived happily ever after. Jadvabishya kept desperately struggling to get out of the net, and became a part of the wedding feast.

Moral of the story? When the market starts to tank after making an intermediate top, it is better for conservative investors to book their profits and stay out, so that they can live to invest again at lower prices.

The smarter investors can remain in the thick of it and use their market timing and asset allocation strategies to reap maximum benefit.

Those investors who believe that being able to profit from the stock markets is pre-ordained and depends more on luck than strategy, are destined to lose money.


Jasi said...

Nice story ... :)
Made me think ...
1) Conservative investor: "tank after making an intermediate top," and "invest again at lower prices." ... well that sounds like market timing to me. Not sure if the conservatives wud be game for that.
2) Smart investor: "can remain in the thick of it and use their market timing and asset allocation strategies to reap maximum benefit." ... not sure about this one too ... how much is maximum? I guess it is all going to be relative. And if you get it wrong in this market, you pay heavily!
The point I'm trying to make is, smart or conservative, if one wants to "play" one will have to take a call, in other words, "try" to time the market.
p.s. > Are you trying to suggest "conservative" investors are not "smart" and "smart" ones aren't "conservative". By your definition the smart ones seem to be he more adventurous, but if they lose big, they wont look too smart wud they?
Thanks as always for such insightful post Sir!

Subhankar said...

Appreciate your feedback, Jasi.

The objective of the post was to make investors think - to do that one had to stretch the allegory a little!

The moral was based on recent conversations with some of my investor friends. And you are right - all three fishes were trying to time the market in their own ways!

Nishant said...

The smart investor could also use a south bound market to invest in some of the blue chip mutual funds....high units at lower NAVs

Subhankar said...

That may be a smart move, Nishant. As long as the fund manager is also smart. MFs tend to do the wrong thing at market tops and bottoms.