A case for contra-optimism

This column is being written in praise of the suddenly-forgotten art of being conservative.

Awkward time to be writing such 'trash' but let me be the ostrich.

I am not saying that we are headed for a bearish market but what I am saying is that all blue sky markets are built around the foundations of some grey, conservatism and that notoriously new animal called 'black swanism'.

Before this column is dismissed as the work of a perpetual cribster set out to interrupt this national carnival, let me tell you about 1984. Ms (Indira) Gandhi had been assassinated and the general consensus was that there would be blood in the ring when the markets re-opened. Sure enough, the markets opened weak but something interesting happened thereafter on the Calcutta Stock Exchange. A number of jobbers went to a sworn bear called Debuji. Debuji was the perpetual pessimist; each time shares rose, Debuji shorted, earned a fortnightly badla and lived off our optimism. Literally.

Now that the 'great banyan' had fallen, those with long positions feared that they would be bankrupted; worse, there could even be a possible payments crisis that affected investment sentiment. So the bulls approached Debuji with an unusual request. Would he, in the interest of the exchange, be willing to square his positions and enable all those bulls to sell theirs as well - at a negotiated price. I wasn't there when this happened but someone who was related an unusual sight - jobbers in a queue reciting their positions to a wizened Debuji while his jobbers noted down details and squared off positions.

Moral: It was a bear who bailed the exchange.

Bears create bull markets; they provide supply at intermediate points, they help create two-way liquidity; they make it possible for those who might have missed out the initial run-up to enter the next decline; they contribute to the grand national exercise of making stocks affordable.

So let this column be my contribution to the contra-optimism movement.

One, there is little immediate basis in the run-up of a number of stocks, so there could be a time when all those who have bought into them in the expectation of an earnings increase might engage in fatigued liquidation and move to other counters where an increase in earnings has already happened and where counters appear under-priced.

Two, the next big general correction may happen when stocks have been discounted so far into the future (the legendary 'based on FY17 earnings, this stock appears cheap') that each time something unexpected happens, stocks scamper to humble reality.

Three, much of the (Prime Minister Narendra) Modi reputation is based on achievements within a territory over which he had absolute control; a number of reforms now being conceived by him have to be implemented in states where he has absolutely no control. When markets recognise this, there could be something more than just a technical correction in store.

So while future-readers may talk of 35,000 by the end of next year and 50,000 by the end of whatever, it might be worthwhile being the ultimate fall guy who begins to wonder the extent to which people may actually lose money before the index can get there in the first place.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed