It pays to remember some home truths about the market

Over the last couple of days, I heard some mutual fund heads talking on television about the current “compelling valuations” in the stock market and how investors should just buy and sit tight for a couple of months.

But when they were specifically asked what they themselves were buying, there was no clear answer forthcoming. Which brings me to the question, what / who / when should you trust with your money? My answer is simple —- yourself!

It is not that the people voicing their opinion in the public domain are dishonest. They just have to be wrong to make you poorer. They may also (more often than not ) omit to mention a few important facts (the valuations are compelling but I am not buying yet!). When it comes to survival, it is usually to each his own. History has recorded for posterity that humans have eaten their dead kith and kin in wars and other extenuating circumstances to survive.

Why should the markets be any different?

What are the markets anyway? Markets are a collection of all the emotions of the participants put together. Greed, fear, compassion and cruelty included. When it comes to self preservation, even murder is allowed by the courts in certain circumstances. Big-ticket players routinely lead retail players to slaughter houses. Cold bloodedly and calculatively. Books have been written on the subject, talk shows conducted by the dozens but retail players have yet to learn that lesson.

Going further, I have found that Indian markets are a lot more volatile compared with their developed counterparts as the participation has a higher component of emotions in the combination of intelligence and emotions. It should be the other way around, actually, because markets are mathematical, unemotional and unforgiving. Why should you be emotional? Why fight the markets in times of adversity and treat a losing trade as an ego slight?

Factually speaking, we are all susceptible to a feeling of vulnerability during taxing times. We seek someone to hold our hands during trying times and tell us that “all will be well”. We seek strength in numbers - in the fact that we are not alone in our belief of buy & hold. Unfortunately, the markets are readying us for mass murder.

Before you lose any more money in the markets, I suggest reading an excellent book -The Faber Report, by David Faber. The world-renowned CNBC US anchor warns investors against relying too much on voices in the public domain.

Faber has written very boldly —- dates, events and names of analysts, fund managers and managements who have (mis) advised investors in the media and taken contrarian positions in the market to profit from their crooked actions in doublequick time.

He also propagates the idea of upgrading one’s own skills to become self-reliant in the market place —- an idea that I totally agree with. Sometimes, our analysis seems to point towards an unpleasant development emerging in the markets.

Expert / public opinion seems to be pointing towards a reverse case scenario. Who do you trust? The answer is, both. Keep an eye on what is being said but keep doing your own due diligence. Sure, you may go wrong. At least you know you have yourself to blame. But do not form a habit of running away from bad news because it is unpalatable. In financial markets, pain is not in adversity but in the denial of that adversity’s existence.

Legend says ostriches bury their heads in sand when confronted by predators. While studies have shown no proof of this, the analogy is pertinent: they just become easy meat. Legend also has it that Red Indians kept their ears to the ground to hear the hoofs of horses carrying in white settlers. Maybe it’s time you started keeping your own ears to the ground rather than relying on “borrowed” ones.

After all, who can protect your wealth better than you yourself?

Posted by toughiee on Tuesday, March 18, 2008 at 3:00 PM | Permalink