Clueless on Dalal Street

Last Updated: Thu, Aug 16, 2012 04:42 hrs
BSE Sensex, Nifty hit 2-year lows

If an alien chanced upon popular stock market lingo, it could be forgiven if it concluded stock markets are a branch of zoology, as the talk would be liberally peppered with terms such as bulls, bears, butterfly spreads, etc.

Besides these, it might also be perplexed by three seemingly inexplicable terms which pop up constantly. These are:

The stock market is very volatile: So, what is this volatility? While there is a volatility index with the National Stock Exchange, the term is used loosely, without taking the index numbers into account. And, does it mean that returns will rise or fall? Few experts have an answer.

Given the fear instilled in investors about volatility, they often tend to see this oscillation more as a threat than an opportunity. Hence, the term 'volatility' is often used with a negative, rather than positive, connotation. It is said: "Fortune favours the prepared mind". So, too, investors who undertake the pain of unearthing good stocks through research, actually welcome volatile times, as sudden and sharp rallies and depressions in stock prices provide exit and entry opportunities.

In chemistry, any volatile compound often displays the tendency to evaporate into thin air. Can we extend this to imply that money invested in stock markets always vanishes into thin air? Hopefully not! What they may actually mean is that unlike other investment avenues such as fixed deposits or the Public Provident Fund, stock prices gyrate.

The stock market is very risky: This is an extension of the first term, and alludes to the danger of losing the money one has invested, due to a fall in stock prices. Sure, no one likes to lose money but any fall must be put into perspective. There are myriad examples of stocks falling in the short term and then going on to make new highs over a longer period of time. Investors must only fear permanent, and not temporary, loss of capital. In the Art of War, Sun Tzu has written "Every battle is won or lost before it is ever fought".

Similarly, undertaking the requisite due diligence before purchasing a stock will drastically reduce the chance of permanent loss. Just as in other things in life, stock market investing is a game of probabilities and one can improve one's chances of success by taking the right steps, rather than mindlessly purchasing a stock based on tips and hearsay. Other than this, investors also ignore the fact that the probability of capital loss is not zero even in sovereign bonds. The travails of investors in Greek bonds are a testimony to this. Also, loss of purchasing power due to inflation is an insidious way of losing money. Investors in government small savings schemes and bank fixed deposits face this risk.

The stock market is range-bound: This statement always tops the charts of 'market experts'. Fort-unately for them, this statement is like Lord Vishnu; it has no beginning and no end (although, theoretically, it is bounded by zero). Well, at any given point, the indices will always be in some range. This could be anything from one per cent to 50 per cent or even more. How does such a statement help the viewers/readers? Are they better off after listening to such a prognosis, than they were before? It is a mystery as to why such experts are rarely quizzed on what the so-called range actually is…few will have an answer.

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