The festive season has begun. I decided to go shopping with a friend. As I waited for my friend on the skywalk, which leads to the market, I saw a little boy throwing paper planes in the air.
I know he was littering in one way, but the excitement on the little boy’s face was priceless. So despite being a supporter of Swachh Bharat Campaign myself, I thought it prudent not to stop him. I am sure we all have done such things as children and enjoyed the same thoroughly.
Coming back to the little boy, he had around 10-20 paper planes which he was throwing in the air from the skywalk after a gap of a few minutes. I noticed another little boy standing on the road below the skywalk, waiting to collect those paper planes.
Few of those paper planes launched in the air went very high in the air. Some went far and out of sight. There was one absolute certainty which the little boy standing below on the road knew: eventually, after taking some unknown flight path, at some random location nearby, the paper planes will hit the ground and this was guaranteed!
As I watched the entire episode, I found an interesting similarity with stock market investment.
We often hear investors talking about new targets for Sensex - 40k by Diwali, 42k by Christmas and many such. We also come across investors who talk about a looming global recession which will push Sensex back to 30k levels or below. In short, we have different types of investors who are trying to guess the next movement in the market.
Just like the paper airplanes which never took a predictable path and yet one could predict the final outcome, in stock markets too it is difficult to predict the direction of the stock market in the short term, but we definitely know in which direction the stock markets will move in the long term.
Because in the long term it is higher corporate earnings and better economic conditions that drive the market, unlike in the short term, where any random incidents such as US-China trade wars, hike in oil prices, terror attacks, NBFC crisis etc. can affect the market. In short, long-term growth of markets is heavily dependent on the growth of the Indian economy.
In the short term, markets always witness extreme volatilities. Here are a few examples:
- When Prime Minister Modi got re-elected for a 2nd term in May 2019, Sensex and Nifty touched new highs of 40k and 12k levels respectively.
- Post the introduction of enhanced FPI surcharge in the budget 2019, Sensex lost more than 7% and eroded more than Rs. 14 lakh crore wealth over the next few months.
- When the finance ministry rolled back the enhanced FPI surcharge on 26th August 2019, Sensex and Nifty moved up by 793 and 228.50 points respectively.
- On 20th September 2019 when the finance minister announced cuts in corporate tax, the Sensex jumped by 1921 points.
It is of no use trying to guess the next movement in the market.
Markets are highly volatile now, and many quality businesses have corrected significantly due to recent market corrections. By investing in good quality businesses, anybody can ensure that their investment portfolio too will rise when the market rises, which it surely will over the next few years, given India’s long term growth story, strong consumption-driven economy and a reform-centric government at the center.