Last week, everything in the market was in the pits and the world was going to come to an end! Now, all seems to be fine and the market is behaving as though the worst is over!

On Wednesday & Friday last week (8th & 10th Oct), many large stocks in the Indian stock market fell 10% each day! On Thursday, 9th Oct (we were closed for Dusshera), the Dow Jones Industrial Average (DJIA) in the USA, fell more than 9% in one day, one of the worst performance it has had in its life. (The DJIA is one of the world’s most followed indices to assess the health of the US stock market and indirectly the US economy).

The world, after sleeping over the weekend decided that enough is enough and yesterday, Monday, 13th Oct, the DJIA rose over 11% in one session, the best ever performance since 1938! Almost all markets in Asia & Europe rose sharply the same day. Our markets rose over 6% and several large stocks rose 10-20% and many smaller companies, even more - all in one day!

Consider this … if the mood before the weekend had persisted, at the rate of 10% fall per day, the world would have come to an end in about 10 days. Okay, not the world, but the prices of all the companies listed on the stock market would be ZERO, in other words worthless! Its equivalent to saying that the value of my house or my car or any item I own will be zero. I am sure you will agree that this scenario is just ridiculous. Even if the financial world was really coming to an end, there would still be some price and value left in the companies. If this is not sheer madness, then what is?

48 hours later, after a weekend break, the mood has completely reversed and markets all over the world have jumped as though all the world’s problems are all over! Of course, a lot of stuff has happened over the weekend in the nature of various policy and monetary interventions by various industrialised countries that aided the change in sentiment but certainly, the trouble is not over – yet!

What’s really important to note is how fast a change in mood and sentiment can dramatically change the minds of entire populations, traders, investors, bankers, brokers and how we collectively act to move from (almost) hell to (almost) heaven. This is Mob mentality on a global scale!

None of these mood swings that the markets are having have much to do with Life’s Realities. I mean, how much in life really changes in 48 hours? On an average, not much except everyone is 2 days older! Any announcements that any government has made does NOT translate into action immediately. Many of the interventions announced will take weeks and months to get implemented. But, well, the markets react anyway, that’s their nature!

Have you noticed that after you failed in an exam, had to deal with a loss, an accident or whatever, after all the crying and depression, you had to go back and do whatever you had to deal with the situation? And at that time, your mood was really that of getting through the task rather than feeling sad?

 

Also, noticed that after the joy and euphoria of a bonus, promotion, marriage, birth of a baby, one had to well, settle down to dealing with the routine, boring and not-so-happy tasks of the new event?

The Markets are in that state of emotional turmoil, first of despair and now of euphoria. They will get over it soon and will have to deal with the facts and figures; the banking crises, the slowing economy and its effects on wealth creation or destruction, which is what the Markets reflect. This will take months, the Market’s mood swings will settle and we will have a period of a more “steady state” period for a few weeks or months (and indeed, we may drift lower on the Markets while the Market does all this).

If anyone sold their shares last week, they would be sorely regretting their actions. On the other hand, anyone who invested last week would be very happy and glad because they would be about 10-20% richer. But note that the OUTCOME of either action was NOT predictable and in moments of intense emotions, which is exactly the case currently, it is very difficult to predict the short term.

While the Market settles down and does what it does, here is something to think about …

Astute traders would have made quite a bit of money with the recent sharp up and down moves. Most folks however don’t belong to that category. Indeed, many traders have lost money, some lots! Investors (if there are any!) will find that the falls would have presented them some mouth watering and wonderful opportunities. Further had they bought, they would NOT be tempted to sell off with the recent sharp up-move - IF they really are Investors and not Traders!

Which category do you really belong to? Are you, or more likely, were you a (short term) Trader who now calls himself a (long term) Investor? Are you the Emotional type who is affected by this Market Madness or someone who can look at Life’s Realities and keep a cool head?

Do think about this as over the next few posts I look forward to share my thoughts about the opportunities that the current situation has thrown up. In the meantime, don’t be surprised if we have more quick changes of mood in the Markets. You are very likely to be much richer and much poorer from week to week if not day to day.

In the meantime, I look forward to your questions, suggestions and well, anything else you have on your mind. Send them to askmusa@gmail.com

With Wishes & Riches,

Musa

( Dr. Musa R Kaiser is a Bangalore-based doctor, equity investor, derivatives trader, investment advisor and most importantly, a financial educator who is passionate about supporting individuals and families achieve their dreams. He is the founder of http://www.bangaloreinvestorsclub.com )