I had done a post on Stock Market volatility (hence this is …post 2)…I had mentioned some of the questions that I hear from the audience of my class (aka students)….so let me try answering them..in a post. I do not answer questions one-on-one on email – I do it only in a class room…so here are the questions…and the answers…

• Should I sell before the market crashes more?
• We are in the middle of a big crash?
• Is this a crash or a correction?
• But Subra, the market ALWAYS prices in all the information does it not?

The first question is such a funny question. It means YOU know that the market has stopped falling…AND you know that the market is going to go up again. Wait a minute – you may know that the market has stopped falling, but how do you know it will not go sideways for a long time – real long time? See infrastructure?

So please stop THINKING you know where the market will be 2 weeks from now or 2 hours from now. Because you do not know. As simple as that.

What is a big crash? who is to decide what is big, and what is a crash? When the answer to both these questions are “actually I do not know” – then what gives you the ‘over-confidence’ to ask such a question? and say it falls 20%, will you assume that the crash is over? what happens if your hypothesis is wrong? will you buy call options ?

“This is just the start of a big correction!”

The financial press loves exciting headlines, but they’re clearly trying to predict the future when they have no ability to do so.  If I could really predict the future, why would I be writing a blog? I would be writing reports for my own team (perhaps)!

The truth is nobody knows what’s going to happen next.  I consider myself brilliant because I know this, and I accept this! As I write this, I do think that we are in still positive for the year! I wouldn’t consider that a crash or even a correction.  Hell, that’s not even a loss for the year!

Furthermore, the predictions of a crash – at least to my primitive mind greatly exaggerated when we take the scale of previous corrections and crashes into context.  When you see the market charts over long periods even the 1929 crash does not seem so big (oops I am  into hyperbole now!).

Some intellectuals would want  you to believe that the quoted share prices always accurately reflect the investment’s earning power. Sadly the market has very little respect for the stuffy professors who publish academic papers. The street and investors who actually live (and invest) in the real world are the ones who create that information pricing!  Share prices can (and does)  sometimes (many times?) become unhinged from true “intrinsic value”.

Obviously, the current and future earning power of a business can’t fluctuate by 50% in a matter of 3 days.  Did the shares of Dfhl not fall from 620 to 300? or even lower in a couple of days ? Nor can the accountant’s version of business valuation (assets – liabilities = book value).  Three days is just way too little time for major valuation changes to occur. However that is exactly how the media expects the market to behave. Handling clients is easy. Handling the media is an art.

Something else must be going on when prices vary this much (and this quickly).  Is Mr. Market being irrational?

I DO NOT KNOW. Repeat. I do not know.

I suppose it is possible — a correction could happen.  A crash could also happen.  The market might also go on to enjoy a 10% gain for the year. Or a NaMo winning could get the market up by 100% over the next 3 years.

Knowing we do not know is the biggest learning.

Keep learning.