On March 9th, 2009 the Sensex closed at 8160 points. Cut to over one and a half years later, at the time of writing this, the Sensex is at 20589 - a whopping 12429 points or 152% higher. Who could have ever thought that this was possible?

This is precisely the reason why I have repeatedly observed that the market is like a class room where we are taught lessons. The same lesson is taught to you time and again till you learn it properly. Once you have finished your learning, you move on to the next class room where you are taught another lesson. Successful investors are those who learn the most lessons along their investing life.

The first lesson which is repeatedly taught is that it is pointless, even impossible, to predict the market. Yet, we refuse to imbibe the same. Investors continuously tend to look towards self-styled experts and market gurus to give them a prediction about the expected Sensex level.

Currently, there are various predictions going around that the market will breach 23000 by year end and that we may actually witness a level of 25000 by the end of the fiscal and so on --- the actual number doesn’t matter, the amusing thing is that none of these people were able to predict the imminent rise beforehand, however, once the market started flourishing the ‘experts’ have started envisioning all time highs and great achievements for time to come. And on the flip side, when the market was sliding, these very same people were busy making dire ‘predictions’ of approaching doomsday thick and fast.  

Herein emerges another lesson that we can all learn. And this lesson is best summarized by the following quote by Bernstein William in this book “The Intelligent Asset Allocator”
"There are two kinds of investors --- those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type --- the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know." Truer words were never spoken.    

History has repeatedly proven, time and time again, that it is impossible to time the market. National, international, political, geo-political, economic --- there are far too many factors which simultaneously affect the stock market and it is humanly impossible for anyone to forecast the index level.
Like I said, as I write this, the index is at 20001. But no human being is capable of knowing for sure where the market will close tomorrow evening, or the next week or the next month or even later.

So, if you invest or disinvest based on market movements or expected market movements, it amounts to pure speculation. And know this much --- you can either speculate or accumulate, but never both.
Incidentally, the main thing that is causing anxiety among investors about the current level is the anchoring or benchmarking effect. The market is deemed to be overheated currently partly because it is so close to the previous all time high. If this (previous all time high) figure had been say 25000 points instead 20873, investors in general would have felt far more easy about the current level.

That being said, since valuations have risen so rapidly with the Sensex trading at 21X trailing earnings and the rally not being as broad based as one would have liked it to be, it wouldn’t be a bad idea to book some profits as one goes along.

However, it is important not to go overboard. Liquidate around 20% - 25% of your portfolio. Invest that money in a liquid plan and start an STP (Systematic Transfer Plan). This way, not only would you have realized some profits, but will also maintain participation in the market.

What makes India so attractive is that, at an astounding 8.5% pa. we are one of the fastest growing economies in the world. At a time when the West is in the midst of nationalizing its banking system, Indian banks are well capitalised, well regulated and most of them are already nationalised. A savings rate of 35% and a favourable demographic model makes India as insulated as it can be against a global recession. Therefore – if RBI manages to control inflation thereby maintaining the purchasing power of the rupee, in an economy that has limited dependence on exports, growth can be maintained on the back of domestic consumption itself.

This situation reminds me of a quote from Warren Buffet. He said – “Five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the economy, over a period of time, will do very well, and people who own a piece of it will do well. Just don't borrow money to buy your piece.”

While Mr. Buffet’s statement was to do with the US market, it can literally be copy-pasted for our market too. Over the next five-ten years, India will do well. Do participate in this prosperity. And the best way to do this is by staying invested over the long-term. Do not try and time the market. Despite all the upheavals and turmoil that we go through, at the end of the day, India is progressing. And this progress will manifest itself in the stock market one way or another. The timing is irrelevant, that it will happen is certain. Whether you can benefit from it is up to you. The question is --- are you up to it?

The writer is Director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com

e-mail: Sandeep Shanbhag

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