By Dhirandra KumarCEO, Value ResearchOne of Warren Buffetts less known but deep quotes is, When dumb money acknowledges its limitations, it ceases to be dumb.
Theres a lot of meaning in those 11 words.
Conventionally, smart or dumb money means exactly what it means.
Dumb investors dont know how to invest, what to invest in, and when to invest.
What the grand old man of investing is pointing out is something almost all of us can use because weve all been dumb investors more than we have been smart.
Once you admit to yourself that there are things you dont understand about an investment, then you become, for all practical purposes, smart.Which brings us to the number one worry of every equity investor nowadays: what will happen to the markets after the election results What is driving the markets before the elections Does the market know something that we dont Is there some secret formula to reading the ticks that will tell us what the collected wisdom of the crowd is Basically, its the same old question of what drives stock prices.
Long ago, there was a study on what exactly drove stock prices.
The idea behind the study was to look at how prices moved over a long period and then map movements to what was later delivered by fundamental economic and business processes.The researchers found three factors that explained almost all what happened in the equity markets.
The first was the productivity of the economy, its overall growth.
This was a factor over the long term.
The second was how much benefit of the economic growth ended up going to households.
The third was risk aversion, which is essentially peoples reaction to uncertainty about the future.This study came to the conclusion that 75% of the movement of the stock market is historically explained by this third factor.
This basically means that the main shortterm driver of the market are emotions.
What people feel about whats going to happen is responsible for 75% of the short-term stock action.In the middle of the clamour for somehow knowing what the election results will do to the markets, this is something to pause and consider carefully.
By itself, it does not matter what you know or do not know.
Not just now, but even by the afternoon of May 23, the way the equity markets will react will largely be driven by emotions.
It will be a knee-jerk response.Eventually, your investments in Indian equities are linked to the broad growth of the economy.
The elections impact on equity markets will be through that route alone.
The results of these elections will have a lasting impact on the economy.
However, this is an effect that will play out over years or even decades.There will be plenty of time to choose your course of action after careful study and calm thought.
For now, ignore the markets and make sure you do the right thing with your vote.