I got this email yesterday:
Everyone seems to be super bullish on the Indian equity markets, but the valuations at current juncture look overly stretched be it PE Ratio, CAPE Ratio, Shiller PE and not much improvement in corporate earnings. How do you read the current markets? Is it good to wait and sit on cash or ride the current wave as it is very difficult to predict the correction? Your much-needed reply will be helpful. Sir request you do not give answer diplomatically.
Here's my response:
One should never approach the market with this assumption: I know what's going to happen..
When it comes to financial markets: Here's the basic fact -
"Market commentators know absolutely nothing and pretend they know everything"
— Deepak Singh (@smarket) June 26, 2016
There is nobody who knows the future
Every day, we listen to people who claim to be experts on markets. They tell you that market will be doing this because of x, y and z. You process that information and if that matches with your thought process - you start believing it. Your focus is on what market should be doing, not what it is doing. The problem becomes extremely difficult especially when the market starts doing something that is totally opposite to your thought process. So, if you start believing market is expensive -you will look for that reasons all the time. You will reject any upmove. There is tendency to become bitter. You start saying - Maroge Sab
One should have a healthy respect for the market. Don't think too much and focus on what the market is doing right now
Trust your skills and play accordingly
Trading and Investing is like playing a sport where you trust your skills. You see the ball and play it accordingly. So, if you see if it's a high scoring pitch and players before you are able to score well, then you play accordingly. Now nothing lasts forever. There will come a time when the pitch will deteriorate and you will see lots of trades ending up in disappointing fashion. That will be an indication that one should hold back and not trade aggressively but till that time -just being scared for no good reason makes no sense.
What should one do?
Create a Trading/Investing Plan. Example:
I will buy XYZ stock for this reason and my reason is based on this assumption. Also, have an exit plan - What If I am wrong. Then once you have done that - execute the trade and then keep monitoring the stock and the reason you were in that trade. Also, be ruthless in exiting if things don't go as per plan. In this way - all the parameters are in your control and you are not surrendering yourself to the unknowns.
I hope this makes sense.
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers