Investor Psychology - A New Perspective

Two headlines in a recent issue of a leading newspaper grabbed my attention:

a) Sensex up 485 points, at 32 month high at 20,688,

and right below it,

b) Investors pull out Rs. 12.8 K crores from equity mutual funds.

While the phenomenal upsurge in the Sensex under the first headline was attributed to foreign fund buying, backed by India’s strong global cues, the latter was attributed to retail investors.

A spokesperson of a mutual fund was quoted “ Most investors who wanted to redeem, have done it now since investments were made when Sensex was trading between 15000-21000 levels. So , investors are pulling out money from equities and allocating to monthly income plans, liquid funds, and bank deposits.”

While this decision by some of the retail investors, could be deemed prudent, given the fact that the brutal scars of the stockmarket meltdown just two years ago, is still fresh in the minds of many, yet this very action by some retail investors reveals a typical psychological aspect which governs such behaviours, and I would call it The Past Expectations Syndrome

The Past Expectations Syndrome essentially means that for some investors, the dramatic events in the recent past or those which are still fresh in one’s memory, have a significant influence over one’s actions. This is simply because one is so overwhelmed by some past occurance, due to its positive or negative fallouts of a significant nature especially over that individual, that he is compelled to believe in a possible repetition of the same, even though the circumstances which led to the earlier occurance have changed significantly ever since.

Thus, when the Sensex first reached an all time high of 20,000 plus in Jan 2008, the downward slide began steadily, only to touch the sub 8000 levels in October that year post the collapse of Lehman Brothers. At that time, some of the business journals were full of speculations regarding the lowermost levels at which Sensex could bottom out in the next few months, and the speculated levels ranged anything between 5000-6000.

What a contrast that was to the grand predictions of an all time high of 30,000 plus levels for Sensex in October 2008, which were going rounds in Jan that year !

While the past experiences have a very strong influence over one’s actions, especially where the experience in question is really unpleasant akin to the sharp meltdown of the stock markets in 2008, yet to extrapolate the same in the future can be highly erroneous, as the circumstances could have changed dramatically ever since.

Now coming to the actions by some retail investors to pull out of the equity markets at this juncture, it can be presumed that they are reasonably confident that the stock markets in India have peaked out at this juncture, and now the only direction going forward is southwards, akin to what happened two years ago.

It is assumed that most of such retail investors are rational, and intend to maximise their gains from the stockmarkets.

While the possible performance of the stockmarkets in India in the near to medium term can at best be a matter of an enlightened debate, with the votaries from both the schools of thought giving equally convincing arguments to support their claims, yet the actual outcome could amaze even the most die hard optimists or shock even the most diehard pessimists.

This is because of the various imperfections in the world community as a whole, some of which could have a deep impact on our stock markets positively or negatively, and which may not mirror the true fundamentals of our economy.

But yes, having said that, what some investors tend to forget is that our stockmarkets, have an uncanny knack of beating the previous highs by a significant margin every now and then. Thus, ceteris paribus, there is every reason to to believe that for a rational investor with a reasonable level risk appetite, it would pay to stay invested. And the greet the new heights scaled by our stockmarkets, as one of the lucky beneficiaries , rather than watch from the sidelines, and say “ How I wish I had stayed invested !”

To support my hypothesis, let me recall that in April 2006, the Sensex reached a level of 12000 plus, an all time high then, only to tumble down to 8000 plus levels just two months later. From then onwards it began consolidating and an upward journey, which peaked at 20,000 plus levels in Jan 2008.

Thus, some of those investors who had entered the markets in April 2006 , might have exited at the same levels subsequently, due to the impact of The Past Expectations Syndrome. Surely, they would have missed out benefitting from the new peak by a significant margin of 8000 points.

Now, going forward from here, will the Sensex do an encore, and peak out at significantly higher levels than 20,000 plus in the medium term?

I would not be surprised at all.

Ayodhya - Beyond the Verdict

The remarkable calm with which the Indian public at large, reacted to the much awaited verdict of the Allahabad High Court on the Barbri dispute, stands out as an unparalleled symbol of maturity, responsibility, and reason with which we the people of India have moved on since 1992.

The most dastardly act on Dec 6, 1992 perpetuated by some so called Ram bhakts and their patrons from some promiment political parties, shamed every right thinking Indian who had held his/her head high in the world community, while cherishing the foundations of secularism and religious tolerance on which our nation state is based.

The Nation awaited with bated breath as the verdict was about to be delivered, and this time the government took no chances where law and order was concerned. Needless to add, not only the government but the Nation as a whole heaved a sigh of relief when no untoward incident was reported from any part of the country.

The debates and opinions expressed by some of our fellow citizens on Televison , the stand taken by some political parties and religious groups, as well as the editorials of various leading dailies on the said verdict, proved it beyond doubt that the notwithstanding the beliefs and sentiments of millions of Hindus and Muslims over the 2.77 acres of disputed land at Ayodhya , the overall interests of our Nation were paramount and non negotiable.

Yes, the said verdict is subject to appeal in the Apex court, and let the constitutional process take its own course.

Over the years, so much of hatred has been generated over this complex issue, so many innocent lives lost in the mindless violence connected with it, and not to forget the political fortunes made by some through shrewd exploitation of the sentiments of Hindus over this dispute.

But then, considering the historical perspectives, facts on record, and beliefs connected with the same, how come no right thinking Hindu aggressively championed a possible amicable solution overall these years on the following lines ?

“ Ayodhya is one of the most sacred cities for Hindus. There is no doubt that the disputed site is revered by millions of Hindus as the birthplace of Lord Ram. We respect such belief. There has to be a Ram tmple at the disputed site. Nothing wrong in it.

But, if we indeed consider ourselves to be true devotees of Lord Ram, then isn’t it our duty to live upto His ideals as well ? Lest those who choose to forget, the welfare of His subjects was one such ideals for which Lord Ram is revered by millions of Hindus since times immemorial.

The demolition of the Babri mosque, which led to so many innocent deaths subsequently, was an act of grave sin against His ideals, and Lord Ram will never forgive those who committed this sin and that too on His birthplace.

We will build a temple dedicated to Lord Ram on the disputed site, but as His true devotees, side by side we will also ensure the construction of a mosque, and as a major step to ensure he welfare of the residents of Ayodya and adjoing places, we will also ensure the contruction of a medical instttute or a hospital in the adjoining area, which would offer free treatment to the poor and needy cutting across religious and caste lines.

In these efforts of ours, we would seek the cooperation and assistance of our Muslim bretheren.

Certainly, this would be a unique offering by we Hindus to Lord Ram and His ideals”

Remarkably enough today, post the verdict, there is still a debate raging on regarding the necessity of a negotiated settlement on this dispute.

Let Hindus come forward on a proactive basis, mould the opiniion of millions of devotees of Lord Ram on the above lines, and maganimously agree to share half of the disputed 2.77 acres of land with our Muslim bretheren, on which a mosque could be built.

Yes, the government on its part could release a part of the 70 acres of acquired land adjoining the disputed site under its posssesion , to be used only for a hospital or a premier medical institute.

All the three structures – viz the Ram temple, the mosque, and the hospital or the medical institute be constructed jointly by both Hindus and Muslims. Funds would be the last thing to worry about for this unique symbol exemplifying one of the main ideals for which Lord Ram is revered by millions around the world.

But the million dollar question is – which true devotee of Lord Ram would be willing to champion this idea, and make the birthplace of Lord Ram a unique symbol of His ideals, and not merely another place of worship among countless of others around the world ?

The Nation awaits such a true devotee of Lord Ram.