Nifty highs – sustainable or another crash coming soon?

by Manshu on November 5, 2013

in Uncategorized

As the Nifty makes new life time highs, the consensus view is disbelief and incredulity that these numbers will sustain. There are a few voices that are predicting higher highs, but I think for the most part, the consensus view is that these numbers aren’t sustainable.

This reminds me of the US markets from a few months ago when the Dow first started making new highs. At that time the majority view was this wouldn’t last, and the Dow would come crashing down soon. As the Dow has continued to make new highs, people have stopped talking about crashes, and the news of new highs is no longer news.

I know this sounds like me saying the Indian markets will follow the same path and be even higher in a few months, but that’s not what I am saying.

And I’m certainly not saying the markets will be lower than today, or these numbers are unsustainable.

I have always believed that predicting the market is a fool’s errand, and is something best done by people who make more money appearing on TV or writing books than investing in the markets.

So, why make the parallel at the beginning for the post?

To emphasize that this type of thinking is typical for where we are right now. When the market make a new high when it has stumbled along the way for the past few years, skepticism will be the dominant emotion. The reasons for this skepticism may vary, but we have seen this far too often to not recognize it here.

I’m embedding this great image below that shows how the cycle of fear and greed goes.

Recognizing this is important because it ensures you avoid wasting your energy in trying to follow market experts’ predictions on which direction to follow but instead have a system to invest in the market that ignores the short term direction it takes.

In the long term, we all assume that the market rises, else we wouldn’t be in the market, but in the short term there is no way to predict how the market will behave. This cycle continues forever and the best way to work within this cycle and not be victimized by it is to ignore the noise and invest regularly and systematically.

That way you ensure that you make investments when the market is really low, and capitalize on them when the market rises, and also ensures that you don’t invest too much of your money in a lump sum during times of excitement, euphoria or thrill and permanently impair your capital.

Once you get into that habit, the next step is to take advantage of these highs and falls and book profits during euphoria and invest heavily during depressions. I wrote about this not too long ago in my post about SIPs not being the end in themselves.

The key idea is to recognize patterns in how the markets behave – in this instance, the emotions that are commonly associated with every cycle in every country of the world, and make them work to your benefit rather than being drowned in the noise about useless predictions about them.

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