There is something magical about stocks; it doesn’t follow hard rules. It is said that the best investor is the sleeping investor waking after hibernation into windfall profits. When the market is down, the instinctive urge is to scavenge discounted shares while on the other hand there are people dumping stocks in a frenzied ‘stampede response’ for no apparent reason. The prime-mover of ‘Market’ is our inherent greed and greed of people has basis in perception of profit, therefore the ‘Market’ is always a ‘perception bubble.’ If the trends are good the indices over shoot reality and if there is a sense of gloom then the ‘Market’ tumbles to unrealistic levels. It just impossible to for anyone to calibrate exact response to economic stimulus, after all economics isn’t exact science like Physics and Math.
All stable states are in equilibrium in universe, static equilibrium and dynamic equilibrium. Static equilibrium is inert while dynamic equilibrium swings from one end to other end like a pendulum. The driving principle of dynamic equilibrium is cyclical nature of events. The ‘Market’ reacts to a stimulus, since it is not possible to make a calibrated exact response therefore response is mostly an overkill, as a result temporary equilibrium shifts to unstable position. Shortly ‘Markets’ realizes instability and reacts to adjust towards stability but it is not achieved in single stroke therefore the stock market has daily fluctuations a sign of ‘Market’ veering towards stability unless another stimulus disturbs the equilibrium.
The only constant in stock market is its cyclical nature. Even though stocks loathe logic, the cyclical nature has basis on sound logic. The fundamental principle of economics has basis in supply and demand. Cost/profits move with supply and demand depending on glut or scarcity of commodity. The simple logic is that in the time of scarcity people invest in production facility but due to time lag in investment and increase in production the true demand and projection of demand do not match as a result a situation arises (gradually) where demand is surpassed by supply at this point people stop investing in production facility but the damage is already done as already invested capital still increases supply bring in a glut situation. At this point there is complete stop on investment in production. It takes a long time for surplus inventory to dissipate due to natural incremental demand and eventually overtake production led supply and create a supply scarcity. We again come to original situation investment phase. This cycle continues ad-nauseam.
Why can’t we find a safe exit point and entry point? There are too many variables for anyone to properly analyze and react. Besides the ‘Market’ is not one man’s creation, it is sum total of collective perception of consumer/ manufacturer/ service provider etc. therefore not even a super computer can properly predict exact bottom or high of market. Without doubt knowledge of individual stocks help but in conjunction with unpredictability of entire market uncertainty remains about its high and low. This is the time when gut feeling helps. Market volatility was first shown to be a significant cross sectional asset pricing asset pricing. The capital moves from one base to another on the basis of perception of people / experts in anticipation of optimum return on capital. Availability of liquid capital impacts stock markets positively whereas avenues of gains in real estate or in services sector or in any other area of economic activity drives away capital from stock market causing wild swings in market.
In conclusion we can say that no amount of analysis, care, safety precaution beats impulsive investment based on gut feeling and instinct. I have a relative, a kind of sleeping investor but a rank novice in knowledge of stock market but supremely confident investor and also a winner. Where as I have been able to keep my money and make incremental profits this person is truly a winner making money by the multiples rather than in percentage points. Having seen the stock market for close to fifteen years I can say invest with your instinct, stick to stocks your gut feeling suggests and hibernate. Wake to windfall profits. Good Luck!
