Has the Stock Market Bubble started?

The BSE Sensex has crossed the 19000 mark. The sentiment is bullish with FII’s entering the markets and chasing stocks. Why not? Elsewhere in the world there are hardly any worthwhile opportunities to invest in. The interest rates are also very low. Just barely 18 months ago investors were shunning stocks when they were available at most attractive valuations. However today when the prices are rising investors are finding the stocks very attractive. How strange is it? Investors find a stock less risky when the prices are going up and everyone is buying and they find it more risky when prices are down and nobody is buying. Lest we get swayed by the herd in the markets it is important to revisit some wisdom learnt from the last bull market. Is there a build up of a bubble? Yes. Good news are trickling in and the markets are going up on each good news. Any bad news are discounted. The situation is such that there are no bad news at all. One by one like a game of musical chairs we see stocks in all sectors going up. Listen to your favorite business news channel and you become more optimistic as all the available information is positive. Analysts and fund managers show over confidence and over optimism and predict the markets. Investors feel overconfident as their stock prices are going up. They attribute this success to their ability and knowledge to pick stocks. They thus turn in to investment managers in their own sphere of influence. IPO’s are lined up to cash in on the present boom. Last year you had some IPO’s but investors did not make money on listing. Hence the euphoria did not last. However this year with the successful IPO of SKS micro finance investors experienced listing gains. Some other listing gains did follow. The index is climbing up and IPO’s are offering listing gains. Management of companies have lined up to en cash on the euphoria of the investors.Well this is a sure sign of a bubble in the making. With stock prices going up values are difficult to find. When that happens and investors want to invest at any cost the “Greater Fool Theory ” works. Investors are not bothered about valuations but they are buying because others are buying  even though the prices are high. The hope is that there will be another fool to buy it from them at a still higher price. People are not investing but in the guise of investing they are trading and speculating.

So what does one do? I am in no way suggesting that one should sell of all stocks and sit liquid. Stocks are still the best investment opportunities today as they are the best hedge against inflation. Fixed income securities will definitely erode your purchasing power in inflationary situations. Knowing that equities are risky and you are still an investor you are not risk averse. However the problem is that investors make mistakes in the stock markets because they are loss averse. Now is the time not to be loss averse. Ride your winners and sell your losers. Such bullish crazy times can go for an extended period. The challenge will be to ride your winners and sit tight. Do not make the mistake of allocating more resources to stocks at present unless you see a great value. Enjoy the bull run without participating. As it is, your stocks are also going up. Be very fearful of IPO’s hitting the market. Do not chase any fancies of the market. How does one know what is a fancy? Simple; what everyone is talking about, media reporting on the same, mutual funds coming out with similar schemes and IPO’s of the same sector hitting the markets. Remember the fancies of the Power and the Real Estate sectors of 2006 and 2007 boom and the IPO’s in these sectors which made the investors a lot poorer. I can see a micro finance fancy in the offing.

5 Comments

  1. Parag,

    I have been a steady investor for the last 2 years. And I have made handsome gains.
    I was at loss as to what to do in the present circumstances.
    Thanks for the direction. Appreciate it.

  2. Very good article……Very apt thumb rules quoted like ” ride your winners and sell your losers”….and ” donot chase fancy of market” …..very true…

  3. Very Informative article…How true that in Stock Market, the demand-supply theory of economics always works reverse, making us blind to opportunities.

  4. Hi,

    Thanks everyone for reading my blog and for your kind words. I am glad that I have been of use to some of you’ll. Keep reading the blogs and we at PPFAS appreciate all the feedback we get from our readers.

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