The Last Person On The Street Has Entered Dalal Street

The Indian stock market has been on a tizzy over the last one month. From a high of 39,000, Sensex has come down sliding to 34,500 in less than 20 sessions. It reminds us of the times of 1992, 2000, and 2008 when the average person on the street entered Dalal Street and burnt their fingers.

The question being asked these days is not, have you invested in the stock market but rather, have you exited before the crash last week.

Joe Kennedy Story

It reminds us of the famous story of Joe Kennedy, father of John F Kennedy. Joe was actively investing in the stock market in the 1920s and making money. The market was going up, up, and up, and he was making money day after day, like most of the investors.

The ‘doomsday predictors’ were predicting a market crash all the way from 1925, but nothing of that sort was happening except occasional volatility. A sensible investor, Joe was getting worried. He found no reason to exit completely, except making occasional profit booking.

Then, on 23 October, when Joe was rushing to the Wall Street in the morning, he noticed suddenly that his shoes needed a coat of polish. He stopped at the nearby shoeshine boy on the pavement, stretched his legs out to the boy, and unfolded the day’s newspaper as the boy began polishing the shoes. Noticing that Joe was reading the stock market section of the newspaper, the shoeshine boy initiated a conversation with him on shares. He began giving tips to Joe on what stocks to buy, what stocks to exit, and which ones will give better returns.

Joe was stunned for a moment, and he asked the boy how he knew all this. He said he, too, invested in the market and was sitting on a fortune, going by the value of his shares. Joe was speechless, sensing the extent to which the Wall Street activities had percolated. Once his pair of shoes were polished, Joe rushed to the Wall Street and sold all his holdings before the close of day. And he was out—all in a few hours.

The next day was 24 October 1929. Otherwise known as ‘Black Thursday’.

Thereafter, he came to be known for his quote on the market crash. “Once the shoeshine boys have tips, the market is too popular for its own good.”

Got A Stock Tip From A Shoeshine Boy?

The shoeshine boy, taxi driver, barber, beggar on the street, sex worker, cleaner, cook, house maid, car wash person, newspaper boy, neighbourhood grocer are all very enterprising people who are looking to make money in innovative ways. If you ever get stock market tips from them, beware—beware of the stock market.

Listen to Bernard Baruch, famous American financier and stock investor of the yesteryears, who described the scene before the 1929 Black Thursday. “Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely.”

Common sense tells you to get out of the market when you come across such cues. When the profitability of the stock market is so common, and people are not worried about the risk involved in the capital market, and the person on the street is oblivious of the risk of investing in shares, it is time to exit from the market. Exit completely.

But, unfortunately, one emotion often prevails over common sense. Greed.

Equity Of Equity Market

To be fair, when the mayhem kicks off in the street, it gets unsavoury not just with the average investor; it catches up even with the more intelligent ones.

Look at what happened to India’s most seasoned investor whose portfolio value used to be over Rs 20,000 crore. Rakesh Jhunjhunwala, who is known for holding on to his investments for years, has seen his portfolio value nosedive by 75 per cent in the last few sessions. Remember, he built up his trading empire from a $100 to $2.5 billion, and even has up to 20 stakes in some companies. Still he couldn’t escape the bloodbath on the street.

That's fair play. Getting even with the uneven and even alike.

Charlie Chaplin And Black Thursday

But there are good examples to follow. Look at the those who did it wisely. Charlie Chaplin exited the market well in time—two years ahead of the Black Thursday. And he probably would have lost 80 per cent value had he continued with his holdings till the 1929 October high.

Much after disposing of his holdings, he once caught up with his friend and songwriter Irving Berlin for a dinner. It was 23 October 1929, and he advised Berlin to exit from the market as the signals were not very good. Chaplin recommended Berlin to get out immediately and told him he had done so two years ago.

Berlin refused to find a reason and decided to stay on. The very next day, on Black Thursday, he realised the wisdom in Chaplin’s advice. His investment came down tumbling by 74 per cent in value. His $2 million had fallen almost to half a million.

However, there is a positive twist to Berlin’s story. He did not liquidate the stocks any time thereafter. By 1945, his investments gained 60 per cent, and 10 years later, his investment gains were 700 per cent. By the time of Berlin’s death in 1989, his original $2 million investment had grown to $1.1 billion. One thing Berlin did wisely was he invested mostly in blue chip stocks of the time.

And that’s precisely why the market pundits will tell you to “buy and hold” when the markets tank. Remember, in the bear market that followed the 2008 crash, the average US stock shed nearly 60 per cent of its value. Other than Warren Buffett, investors indulging in buying and holding were few. Indeed, a widely expressed view among investment advisers around that time was that “buy and hold” was long dead.

The Last Man Enters The Market

It would be wise to understand that the market follows a cycle—a cycle to trick people who have spare money. It moves from ultra rich to rich, to middle class, to lower middle class, and finally to the person on the street. When the last person on the street is tricked into it, one cycle is complete. The next cycle can start only from the bottom and with a bloodbath similar to a merciless war, where huge casualty is inflicted on the innocent.

A heated-up market always goes by building the noise, reach out to the gullible, naïve person on the street, and trick them into buying stocks. By the time they enter the market, what they can afford to buy would be penny stocks. In the pepped-up greed, they would invest their life savings in unknown companies' stocks, which would get washed out in the impending crash. Most of the penny stock promoters and traders of such stocks would be waiting like a leopard in the bush for the credulous, uninitiated to get into the market in order to cash in on their investments with huge returns. You will never see those stocks in the markets after the mayhem.

Having got their fingers burnt by putting their savings in penny stocks that disappeared in the crash, the hapless victims of the crash shun the market till another boom. This is a cycle—one that repeats every eight to 10 years.