There is plenty of headroom

Blast from the past PUNEET JAIN
The Economic Times MONDAY, DECEMBER 27, 2004

There are many important lessons to be learnt from the last rally after the bull run that began in 1988 (sensex 410) and lasted six years until 1994 (sensex 4000), this is the first time in our recent history that the Indian stock markets have risen significantly for two consecutive years. The BSE sensex rose 80% in 2003 and another 12% in 2004. Is the history trying to tell us something? Well, the romantics and old-timers in the market believe that the current bullish tone will ape the last big rally. They believe that the elements are all right for a sustained rally and short-term mishaps, like the May 17 episode, would not be able to derail it.

The index rose 10 times in those dream six years. It has barely doubled in the last two. Therefore, historically speaking, there is plenty of headroom. The last bull run (1988-94) was led by and led to the creation of some big names in the market. Some of these great names like Harshad Mehta perished in the great turmoil created by such churning of wealth. Some others like Nemish Shah have come to be revered by those who survived. The current run too has thrown up an early list of winners and it would be interesting to see who all last until the last mile in this marathon.

There are other interesting lessons to learn from the last big rally. The most important being - volatility and sharp ups and downs are an integral part of such a run. And the volatility would only increase as the sensex scales new heights. According to old-timers, May 17 type of episodes are very much a part of rather than exception to the script.

• Therefore, longevity and caution becomes a critical trait of those who hope to come out the winners in the race.
• Patience too is a virtue in such situations. Though rare among most equity traders, patience has been the hallmark of most successful investors.
• Excessive portfolio churning often leads to lost opportunities and increased frustration.

However, such sentiments may be somewhat lost in this age of super-qualified analysts and information overload on TV channels. The byte-a-second experts sometimes cloud the big picture.

• Another important lesson from the last rally is that there could be an odd year or so when the returns are not particularly high. We had huge returns in 2003 and a relatively modest 2004.
• In such markets, the sectoral leadership may change and some laggards may come back to hog the limelight.

While the tidings appear favourable for investors, caution remains the most important ally of successful investors. Copious liquidity flows and a favourable tax regime are the cornerstones of this bull build up. If any of these were to seriously change, bulls' hopes will come crashing down.