Tuesday, September 15, 2009

Shorting,circuiting and market shocks.

As a layman with no knowledge of the stock market, I have been baffled and amused by the barrage of talking heads which present themselves throughout the day on business channels. Needless to say, all manner of jargon and terms are bandied about which go swooshing over my head but the point I want to get to this. Is the stock market a relevant institution, worthy of such constant attention or is it an evolved form of gambling? In essence, Wall Street / Dalal Street is a market place where buying and selling takes place, but so is my local market. The output I get from my local grocer is more relevant to my life than what some directory of XYZ company said. Why don't I see my vegetable seller explaining the nuances of price fluctuations of tomatoes to me?

You might say stock markets are a barometer of a country's development and you would be wrong . In my limited knowledge, governments have fallen because onion prices have doubled , none because the stock market fell 1000 points in a day. Maybe stock markets more accurately reflect people's PERCEPTION on what is going on , rather than factual knowledge.Which brings me to my next point.Market sentiment.

See,nobody is sure what the fuel is that keeps the market ticking. Is it fundamentals, speculation,policies or just sentiment? I see a headline "PM suggests economic recovery, markets zoom to 16000". Really?!! How the hell do you know?Did the brokers have to fill out reasons before they bought stock clearly mentioning that it was indeed the PM's splendid baritone that mesmerized them into buying stock again. Why not write, "Saturn aligned with Mars today ushering in the most auspicious time of the year, markets zoom to 16000" Yeah, sounds stupid? But for all you know this may be the reason. Of course, this is not to say that over a long term, if you hold a blue chip stock, you will not make a tidy profit, so there is some logic to the markets. But a significant portion of market participants, and I stand to be corrected, are hedge funds, FII's, HNI's and not the common investor. This also indicates
that most of the market participants are in it for short terms profits or sustained payouts over a longer time. So, my thinking is why do these people bother hiring the best of the brightest people to slog over some complicated algorithms when all they have to do is learn how people think?Simply put, whatever algorithm you have is not going to predict human emotions. If you are in the majority and you sell when everyone is panic selling because some old fogie said something about GDP numbers, you are cutting your losses in the short term while the long term, stable,investor is sitting there in a daze wondering where everybody went and whether his patience and rationality will be rewarded.

Ughh! Obama cut his pinky, we are in for a tough day!

But of course, if you are in the minority and sold when everyone was buying , fame and Fortune beckons. Forgetting all about the law of averages , magazines like Fortune have been running lavish spreads of people who "predicted the downturn" by going short on the market. Seers and oracles you are not, lucky pessimists maybe. Of course, hindsight is 20-20 , These heroes of the modern age have some theory or the other on why they went against the grain. The financial meltdown was a series of chain reactions which nobody could have predicted and if you did , it was because you got lucky or possess a time machine. Only the latter should attract stardom, in my opinion.

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