Readers who follow me of Facebook or Twitter know that I’ve been sounding a tad bearish in recent times.
Some have ever termed me a permabear* for my thoughts on the near term future of the Indian economy and the stock market.
While I am not into the game of predicting the future of stock prices – near term or long term – I occasionally speak of concerns when I see them.
These are my points of view and not predictions. And this time isn’t any different!
These days, I’m hearing a lot of predictions about a beautiful and steady rise for the Sensex in 2013. I do not want to insult you with another prediction.
But whether it’s about the economy or the stock market, I personally see 2013 to turn out bad, or at least worse than 2012.
Stock prices on steroids
The stock market, as I see it now, is simply behaving like a drunkard who is high on an overdose of alcohol (easy and cheap money).
While it continues to climb up the stairs in this heavily drunken state, I am fearful that it will take a deep dive. As for the exact timing of this dive, I won’t pretend to be sure of that.
My simple premise for caution is – that which cannot be sustained will not be sustained.
As an investor, it is important for you to understand that we live in a world that is based on economic structures that are now unsustainable.
We are passing through the biggest bubble (call it a grand Ponzi scheme) in the history of the world – a bubble in government debt, asset prices, and promises.
These bubbles are all going to going to collapse, in one way or another.
But it’s not the end…yet!
Just because things are unsustainable does not mean the end of the world for you and me.
It is just that our world will change. Our job is to make sure that we manage the transition well. As the bubbles collapse, our job is to make sure we are not in the vicinity of ground zero.
And how do you do that?
Fortunately, the answer isn’t difficult.
Stick with quality, and buy with adequate margin of safety. And if you cannot find quality stocks with adequate margin of safety in this environment, have patience and wait for the right pitch. It will come.
For some, this would sound too simplistic and unbelievable…very much like a doctor’s effective (yet unbelievable) advice to take just an aspirin (instead of five complex sounding medicines) for common cold.
But the basic rules of sensible investing aren’t difficult. Practicing them with integrity is.
I am not a permabear!
Before you start thinking that I am really a permabear, I suggest you read a couple of my posts (here and here) that I wrote sometime in December 2011…the time when stocks were about to go down the drain and analysts were shouting “Sell!”
A couple of analyst friends in fact called me then and asked me to justify my “bullish” stand on stocks. I told them, “I have stopped justifying my views ever since I’ve quit my job! It’s my personal view and I stand to be proven wrong. It’s upon your to take it or leave it!”
You see, everyone is entitled to his or her view. What I’ve written above is my personal view and the reason I have this view is because this will help guide me in my investment decisions in 2013 and beyond.
Have a view…then act by it
It’s important to have a “personal” view when you are investing in the stock market. It’s bad to predict things or believe others’ predictions because most predictions never come true.
But it’s important to have a view and act by it (with the flexibility to change it as situations change).
So you may have a view like…
- I see a 70% probability of a fall in stock prices in 2013, so I will invest new cash cautiously
- I see a 90% chance of a deep stock market crisis, so I will work towards my asset allocation accordingly
- I see a 60% probability of overall markets giving a 25% return on 2013, so I will invest a large part of my money in stocks than bonds.
There are a couple of important things about having a view:
- Think in terms of probabilities. In fact, the most reliable forecasters think in probabilities. Predicting the Sensex will certainly hit 25,000 in 2013 is ridiculous. On the other hand, saying there’s a 70% probability of the Sensex hitting 25,000 may be a prediction worth paying attention to. These are vastly different calls.
- Ignore the Sensex nonsense! The top ten stocks by market cap form almost 70% of the Sensex market cap. So a large part of the move in the Sensex will be determined by these ten stocks only. These ten stocks cannot be used as a base to predict how the overall market and your own stocks will perform in the future.
The eminent constitutional lawyer, (Late) Nani Palkhivala once said, “Human nature is human nature and human nature would continue to remain human nature till human nature remains human nature.”
True to my human nature, I would like make a prediction for 2013, and with 90% probability.
My prediction is – All other stock market predictions will be wrong! 🙂
How can I say this with 90% probability? Well, I have Ms. History sitting by my side making this prediction.
Here’s to a happy, safe, healthy, yet most unpredictable 2013.
* A permabear is somebody who is always negative about the future direction of the markets and economy in general, no matter what.