While the resignation of the incumbent finance minister, Dr. Yubaraj Khatiwada, had brought in a level of excitement amongst the investors, the performance of the Nepalese stock market showed that it has no concern for who stays inside the ministry.
Obviously, the pre-market condition was hopeful for the upper circuit breaker in NEPSE as many stocks were above the threshold of 4%. I was one of the many people who were expecting the 6% circuit breaker in NEPSE yesterday. However, the hope stayed only as a hope.
The upper circuit breaker following the resignation of Khatiwada was highly expected but this myth has been debunked by the market itself. It really doesn't matter who stays in power. The market always follows a set of rules that most investors tend to ignore.
Such rumors are highly effective for short-term traders. However, for long-term investors such as myself, the rumors won't make a difference. We all had heard the rumors of NEPSE plunging below the index of 800 after COVID-19 caused the first phase of lockdown. It didn't happen.
Here are a few myths in the market and I am trying to debunk them as intellectually as possible:
- While it is true that Khatiwada under his leadership couldn't find a proper solution to the liquidity crisis of 2016, the market did not crash because of it. Sure, the difference in interest rates would have turned the market around but that growth would have resulted in a bubble-like situation and we for sure do not want that to happen.
- There is a myth that the market is affected by pandemics, wars, natural disasters, or famine. However, the market always runs in a cycle and it is not affected by such factors. Sure, we can experience short-term fluctuations during such periods but in the long run, the stock market is unaffected by such factors. In the Nepalese market, according to the historical data, the market turns bullish for four years and the market turns bearish for three years. This cycle is healthy for the stock market as it is not propped up by a temporary decrease in the interest rate.
- We have all heard people saying the stock market is the place to gamble and make quick money as fast as possible. It is absolutely false. A stock market is a place where the investors get to decide the market capitalization of the publicly traded companies as per their earnings. The volatility in the stock market has created a myth that a stock market is a place for gambling. However, in the long run, the stock market always reflects the earnings of publicly traded companies. In some cases, the stock market predicts the future as well, which is reflected in the high PE ratios of the companies.
- People in recent days have said, our economy is in ruins. But why is the stock market rising? This is because the stock market is not the economy. While the stock market reflects the economy in the long run, in actuality, the stock market reflects the earnings of the publicly traded companies as opposed to the economy. If the earning of a company is bad, the price of the stock of that company won't rise even in a healthy economy. So, choose good companies to invest in.
These are a few points that I wanted to aware of the investors about. The market will definitely fluctuate because of the rumors spread around. However, in the long run, the stock market rewards the companies that are bringing in a lot of revenues and punishes the companies that are not reaching the expectations of the shareholders.
Invest for the long term because the short term fluctuations do not matter in the long run. Instead, take advantage of the volatility of the market by buying the dips. Always remember to be greedy when others are fearful and to be fearful when others are greedy. Happy Investing.
Connect with me on LinkedIn and on Twitter @surajmarahatta
Disclaimer: Investing can be risky and it can turn out to be hazardous as we grab a wrong notion of investing. So, do not take this article as financial guidance. Always consult a licensed CFO or portfolio manager for your particular investment plans and financial goals. Neither ShareSansar nor the author is responsible for the losses incurred in the stock market.