In the last couple of months as the build up to the election has started the noise around the likelihood of a stable BJP government with Narendra Modi as the Prime Minister has grown exponentially. In December there were many doubting Thomases and the most optimistic of them put the BJP tally at 230. In the recent past the numbers have crossed 300 and the die-hard optimists are predicting 375. What is with all these stories? In the stock market everybody just loves a good story with a bullish narrative. There is a tendency to believe that Narendra Modi has a magic wand and the moment he is in New Delhi he will just shake the wand and abracadabra the countries economic woes may just disappear. Whereas change is expected and is very likely to alleviate the economic scenario, nothing has happened just as yet. It is in our DNA to love a good story where the hero wins against all odds and in the current scenario the narrative is strongly bullish.  It follows that there are automatically story stocks and they play their part and tend to run until the story turns out to be (a) Untrue or (b) Partly true.  The kinds of stories that run in the stock market are varied for eg new product launch, new CEO, merger/takeover/open offer, delisting. There have been plenty of instances when a story has turned about to be true and yet investors have lost money. (The classic buy on rumour and sell on news syndrome) What matters most to investors is the concept of an emotional satisfying tale and they make their investments based on that despite the fact that the data available are telling a different story altogether. In the current scenario the Modi Sarkar Story has its origins in the various opinion polls and the media which has actually done an amazing job of making people believe that the result is a foregone conclusion and a cakewalk. There have been stories galore in the history of the stock market and it would be in the fitness of things to recall a few viz

1. The Y2K bubble where tech stocks soared in Jan/Feb 2000

2. The India Shining story with the late Pramod Mahajan as its chief protagonist.

3. The end of the world story in the aftermath of the 2008 credit bubble bursting in the U.S.

3. The inflation story when the U.S. Fed embarked upon their QE program in 2009.

4. The Gold story that it would touch Rs. 50000.

5. The Bitcoin currency as a virtual exchange.

The common theme among all the above is that none of them proved to be true and stocks corrected viciously in their aftermath. It is difficult for people to accept that everyone is wrong on a regular basis but people find staying wrong far easier than facing the truth. The reason for such conviction in staying wrong is that the narrative of the story is so strong that people feel it will play out in the end. In the bargain there is a tendency to ignore the data / facts. It is a triumph of narratives over data and of emotion over planning. In the circumstances investors would be well advised to ask themselves what is the narrative they are following at the current juncture. If it is indeed a stable BJP government then what would be a reasonable level for the index/stocks. Some stocks perceived to be close to the BJP have gone up by almost 80-100 %.  There is a hindsight bias to the current euphoria and that is that people who missed out on the post results jump in May 2009 do not want to be left out this time.  The market tends to surprise with alarming regularity and this time it is not likely to be any different from the past. Investors will be well advised to exercise caution lest they burn their fingers. In the current scenario greed has overcome fear and it is better to sit out the rally and wait for a correction, in short do nothing because nothing needs to be done. The market is bound to correct, when and why nobody can tell. Someone has rightly said ‘Its not what you know It’s what you think you know that ain’t so’. Just examine the following

1. Narrative :That interest rates in the U.S. are headed higher Fact :The interest rates in the U.S. are unchanged

2. Narrative : The Rupee will tend to weaken as the Fed begins to tighten. Fact : The Rupee has strengthened.

3. Narrative : The Indian Economy has bottomed out Fact : The numbers are getting worse.

4. Narrative : Greece is on the verge of exiting the Euro Fact : On Thursday 10/4/2014 Greece has successfully  completed a bond sale which yields less than 5 %

In the stock market money is made when there is a distinction between the fundamentals and the expectations and when expectations run way ahead of whats likely to happen (as they currently are) it does not result in fruitful investing. The point is that there is no need to anticipate and make decisions on something that hasn’t happened yet because successful investing is not just about capturing the upside, but protecting yourself from the downside. It is clear that in the current scenario emotional story telling has got in the way of intelligent investing, what narrative are you following? Instead of the usual Sell in May and go away will it be Buy in May and make hay?


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