fool, or a greater fool

As Nifty closed at 9316.85 today, I am reminded of someone's remark:

And there was a good reason why he said what he said. There are plenty of people who are calling targets for individual stocks and the index. One such is Sensex heading to 60000 in a few years. 

We have to remember that over the years, the productivity increases, GDP increases, corporate earnings increase, and therefore the market index increases. In January 1996, Nifty was at 908.01; it has marched forward despite political and economic issues; cross-border problems; droughts and floods; cold and heat waves; and so forth. We do not need anyone telling us that the index will increase in future; it will. 

That does not mean, however, that we need to start buying stocks overlooking the price. The single most important factor in deciding the rate of return on investments is the price. Therefore, it is always nice to have a good look at it before the purchase. People often do that while buying fridge and washing machine, or even groceries. For stocks, though, they pay what market asks. Well, the market is a maniac. We need to prove that we are not by not falling prey to its psyche. The more it appears to be sloppy, the more we need to be careful. The trick is to make money out of the market inefficiency, and not be part of it. 

As of now, the Nifty is not cheap. Nevertheless, for periodic buyers that does not matter because of price averaging. I have noted several times that for the long term index buyer the index levels do not matter at all, which is actually a very good strategy. Market returns are not going to be bad either. 

It is chasing excess returns that causes problems. Several individual stocks are currently trading at steep valuations. My search is on for gaps between value and price. Cash is a more rational decision at such situations. Ignoring comments like buy or you will miss the bus, etc. is wise. Most advisors will tell you to buy more when the prices are going up and high, and sell when they are down and low. 

As of now I cannot tell at which stage of the market we are in. Yet we can at least learn some lessons from the financial history; and I am reminded of one picture:

We need to ask ourselves at which stage of the market are we entering. Remember though that the final stage of a bull or even a bear market is always a greater fool's market; and fools have to often part with their cash. While we are not capable of measuring motions of heavenly bodies, we can at least try to stay away from the madness of people. Is that asking for too much? I would rather work towards making money out of their madness.