markets on to something

The party
We have been seeing markets run-up all over. Dow is at 16020 and S&P-500 at 1805 now; BSE Sensex is at 21326 and CNX Nifty at 6364. All of these indices are on a high. What has changed to cause this effect is the sentiment. Emotions are flowing in such that an optimistic view is being painted all over. Fear is being folded for the moment and greed unfolded. In other words, the market behavior has changed. 

The right reason for indices to change should be based on the fundamentals, i.e. cash flows, growth and the related risk of the firms in the indices. In the long term that will take place, but in the meanwhile the behavior of the so-called players in the markets influences indices.

Instead of asking questions such as are businesses going to do well given the macro environment, efforts are being made to check out how soon prices can be moved upwards.

For an investor, though, such behavior is good news, for it will help him take the right decisions depending upon price and value. So cheers to pessimism and optimism, and cheers to fear and greed. Speculators and traders make decisions based on ticker prices; investors do that based on price and value. The more the speculation and trading taking place in the markets, the better the profits for investors with the right behavior. 

The past journey
The extraordinary extension for Dow and S&P-500:

However, over the five-year period the Indian markets haven't done that well.

Both Nifty and Sensex are back to where they were in 2008:

Mid-cap and Small-cap have been disasters:

So too have been capital goods and metals. Autos have done relatively well.

FMCG, Health care and IT have done well.

Oil and Gas, Power, Realty and PSU have faltered.

Not really a party
There are lessons to be learnt: when in a downturn go for the businesses that are stable in terms of demand for their products. Other things being equal, a business which sells less discretionary products is inherently less risky. Generally, a business which has lower operating and financial leverage is also less risky. 

Instead of seeking super-normal profits, it is wise to check the downside of an investment first, and then look for the upside. The magic of compounding does wonders for any investment if it is utilized well. Yet, it is not well understood by many; but then why do we care?

The right thing to do now

For the moment, it appears that buying time is beginning to get over for the investors. It is time to either hold on to good businesses, or sell those where prices have peaked.

The rest of the time is well spent just watching the fun of speculative trading from a fair distance, and more importantly, reading and learning about business, finance and investing.

Skills worth developing for an investor: to first understand the difference between investment and speculation, and price and value; second, to understand how to analyze and value a business; third, to have the right behavior, i.e. to try to conduct in a rational manner as much as possible. These skills are inculcated over a long period rather than abruptly.

It is a never-ending journey, but, surely an engaging and enjoyable one.