Assessing stockmarket behaviour is not that tough if you are smart enough. And if you have been trading for long, you will realise that changes in the market scenario due to crisis and major events is only a temporary phase. In fact, author and journalist Stephen Vines writes in his book Market Panic: Wild Gyrations, Risks And Opportunities In Stock Markets that investors should see an opportunity when markets hit a low, soon after a crisis or an event. In an interview, Vines talks to BW Online’s Sanjitha Rao Chaini on the media’s role in contributing to market volatility, general guidelines on buying and selling, and the psychology behind investing.
Considering the volatility of stockmarkets in these times, you must have made several additions to the book. What was the kind of effort you had to put for this edition of Market Panic?
The major changes in this edition of the book are, of course, a detailed narrative relating to the Crash of 2008 but there was even more work involved in updating the data in the body of the work. Having said that it may sound complacent but the central thesis of the book about opportunities in stock markets at times of crisis, causes of crises and the way investors respond to them stood up remarkably well to the events of 2008 and 2009. I did not find myself re-thinking any of these basic contentions.
You have been covering markets all along as a journalist, an editor and an author. In your opinion, how often do financial journalists really get it right in their prediction and perspective?
Hmmm... this sounds like an invitation to be mildly unflattering to my colleagues but I am disinclined to take it up mainly because a lot of what financial journalists do is to report the views of others and make sense of them. Here, of course, lies the crux of the matter because journalists have to plough their way through the words of self-aggrandising market analysts, snake oil salesman dressed up as sellers of various financial products and the usual band of academics insulated from reality yet still claiming to have a superior understanding of things precisely because of their detachment. As a very young financial reporter, I was trained to believe only what could be sustained by analysis of balance sheets and other substantive pieces of financial information – I think nowadays there is far too little attention paid to fundamental analysis of this kind and far too much attention paid to views of ‘star’ investors, analysts, etc.
According to you why do certain crisis such as 9/11 attacks, have a strong effect on the markets -- considering they bounce back in the course of time?
The 9/11 attack was a major event in the political world but it was emphatically not a major event in the financial world even though one of the targets of the attackers was Wall Street. When the US market reopened after 9/11 there was a substantial slump in share prices (echoing around the world), provoking a phony panic, entirely unrelated to the reality of what was happening in the economy or to corporate profitability, which after all, is what share markets are supposed to reflect. I often cite the response to 9/11 as a classic example of the illogicality of stock markets – but always remember that after a collective moment of stupidity these markets regain their sanity.
And what is media's role or contribution to market volatility during crisis? This is really a difficult question because the fine lines between reporting dry facts, making sense of them and thus bringing home the reality of the situation are hard to find. I tend to feel that the 24-hour television news services perform particularly badly at these times because they are driven to keep saying new things when there is nothing new to be said and so trivial matters become headlines and this greatly distorts the picture. On the other hand I have great respect for the way that daily newspapers with a financial emphasis have covered recent events. They contain a mine of information and solid analysis.
What kind of a political set up/atmosphere do you think makes for an ally for a successful steady market scenario?
Without a doubt markets flourish and are most successful in democratic societies that place a heavy emphasis on accountability. We have also seen what happens when markets are allowed to rule themselves. And when the Bush Administration made de-regulation an article of faith, we saw how this brought about an intensely dangerous situation for ordinary investors who were open to extreme abuse by those holding their money.
The perfect time to buy and sell according to you would be...
I am not clever enough to know about perfect times but I do know some general guidelines. Phony panics, such as that which followed the 9/11 attack; provide great opportunities to buy shares. Investors should try not to be greedy, during bull markets when it seems as though prices will rise forever they need to remember that this simply cannot happen so it is important to set profit targets. Therefore, if, say, you have made a 50 per cent gain on a share investment and consider that to be a success don’t worry if other investors have stuck with the share and make a 55 per cent gain – the flip side is you hang on too long to make, say, a 60 per cent gain, but by then the market has collapsed. Generally speaking, the best opportunities for buying shares arise in the wake of market panics, such as that of the present time but the trick is to know when to get into the market. I think the key indicator here is the lowering of market volatility. Once the extreme swings of the market have subsided, great values will still pertain in long-term value stocks and this is the time to start buying.
At the end of it all, there is certain randomness and chaotic behaviour in stockmarkets the world over. And educated people invest their hard earned money in markets and lose money, and make money at times despite knowing that there isn't a single formula that ensures making money in markets. Do you think there is some psychological reason for this or does the streak of greed in people compel them to trade?
The worst kept secret about stockmarkets is that they are driven by the twin irrational forces of fear and greed. Only a complete fool would deny that profound psychological forces are at play in the markets. This is why a great deal of the literature about the performance of stock markets focuses on the psychology of investing. That said it is easy to overestimate the importance of the irrational because at the end of the day markets do perform rationally and tend to reflect the underlying values of the companies they represent. Therefore, I would devote most attention to the moments when markets are at their most irrational because these are the times for canny investors to make real money.
sanjitha at abp dot in
The second edition of Stephen Vines’ Market Panic: Wild Gyrations, Risks and opportunities in Stock Markets was published by John Wiley & Sons in February 2009
Personalities 
Assessing stockmarket behaviour is not that tough if you are smart enough. And if you have been trading for long, you will realise that changes in the market scenario due to crisis and major events is only a temporary phase. In fact, author and journalist Stephen Vines writes in his book Market Panic: Wild Gyrations, Risks And Opportunities In Stock Markets that investors should see an opportunity when markets hit a low, soon after a crisis or an event. In an interview, Vines talks to BW Online’s Sanjitha Rao Chaini on the media’s role in contributing to market volatility, general guidelines on buying and selling, and the psychology behind investing.
According to you why do certain crisis such as 9/11 attacks, have a strong effect on the markets -- considering they bounce back in the course of time?
