Investing in Moods is the Real Risk of Investing
1) Market Capitalisation is the Market Price of all outstanding shares
2) The Sensex / Nifty or any other Index represents the movement the Market Capitalisation of Select Stocks based on the Index
3) The Rising Index Creates a Sense of Prosperity
4) The common man gets most excited with the Index be it the 30 stocks Sensex or the 50 Stocks Nifty because Media Highlights Index Movement more than any thing else
5) And as the Market Index Rises, the Fear of Missing Out (FOMO) Psychology starts to paly out and this mood pushes the common man to step into the Market as he too wishes to have a share of the perceived prosperity
6) A Rising Sensex/Nifty represents the MOOD of the people MORE than the MOOD of the Company Balance Sheet and this unfortunately becomes the moot cause of many a Blunders made by Innocent Misguided Investors
7) The Index Movement is the representation of the the collective greed (rising market) or collective fear (falling market) of the investors
8) When a person steps into the world of investing, he actually intends to buy equity of quality companies
9) Companies that produce good profits offer dividends to the share holders
10) The intention should be to buy stocks at a low price (good valuation)and thereby earn better dividend yield
11) And of course the intention is to also buy stocks with good growth prospects that is represented by rise of market value of shares
11) Whether you buy a company at a high or low price is represented in the Company Valuation (Price you pay per rupee of earning)
12) But Media has no time to talk about Valuation
13) Media is completely driven by talking and screaming about the Growth of Capitalisation i.e Index Growth
14) Media causes the Focus to move away from Valuation to Capitalisation Growth
15) Unfortunately the common man (investor) gets carried away by the headlines
16) It is like moving away from the acting abilities of an Actor and only focussing on the stardom or popularity of the Actor
17) As stocks start getting more expensive at some point they stop representing the Performance of the Company and start representing the Mood of the Investor
18) This is what causes the famous phenomenon known as market bubble. A bubble is formed only to eventually burst
19) The Shifting of Focus from “Company Profits” to the “Growth of Profits” is still OK but what is certainly NOT OK is the shifting of focus to the “Mood of the Market”
20) Hence even if Market Growth is the News of the Season, Market Valuation should continue to remain the Essence of Investing
