In the world of stocks, market fall on negative developments, they all recover after a period and begin to climb on positive developments. Thus, they follow a cyclical pattern. Other markets too have witnessed such cycles. The rate of interest on a home loan in 1997 was around 17.25%. It then went to a low of 7.50% and again rose to 11.50%. The only factors that change each time are the reasons or to be more appropriate, “excuses” for every rise and fall.
In the year 1992, the stock market rises rapidly due to the Indian economy which was opened for reforms and liberalization. At its peak, the Bombay Stock Exchange’s Sensex crossed the 4500 mark in intra-day trading. Then, the Harshad Mehta scam is unearthed and the market tumbles to a low of about 2000 points, which is a fall of more than 50%. Few years later, it again crossed the 4500 level. Also, in the year 2000-01, a sense of euphoria grips people that technology will change their lives and Internet will revolutionize the computer world soon. Sensex crosses 6000 – mark in intra-day trading. But the tech bubble bursts soon and the index crashes to 2,700 points, more than 50% fall. In the next four years, Sensex again crosses the 6000 mark.
Most of the inexperienced investors enter a stock market when it’s rising and they quit fast when it begins to fall. They don’t even think of investing again due to previous losses. In the next market rally, a new set of investors arrive with hope and determination in their eyes. Thus, the same pattern of behavior continues.
It is a known fact that markets consistently follow a cycle of rise, fall and recovery. Thus there is tremendous certainty in markets. After every rise, there is a fall. On the other hand, after every fall, markets do recover and rise again. At each rise, we pray that the “magic” continues forever. But when they fall, we are reminded of doomsday. For a stock market to rise, it could be the end on the controls on economy, liberalization, internet, India growing story etc. For a fall, there could be a scam, bubble burst, oil prices or political uncertainty. But there are all just short-term reasons or excuse.
It is a fact that only few investors create immense wealth from a stock market and also manage to keep it for decades. These investors take the right decisions and for doing this, one needs experience. But experience comes from bad decisions too. Investors, who create immense wealth from equity markets and keep it for decades and at times for generations, do not panic when a market falls. They learn from their mistakes and capitalize their investments during the next rise or rally.
Equity market is a place to generate high returns but slowly. Unless you can tolerate your stock holding declining by 50% and simultaneously keep panic away, you should not enter a stock market.