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.
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