It would be safe to say that the stock markets are in a Brownian motion when observed on a daily, weekly, or monthly basis. They move in any direction.

The botanist, Robert Brown, is credited with discovering the random nature of movements of particles. To witness it, stay in a room with the curtains drawn closed. Then allow a little bit of sunlight to peek in - and watch the particles in the air dancing around with no pattern. That lazy, tuneless, rhythm-less, and totally unpredictable movement of the particles is described as Brownian movement.

Watch those particles in the sunlight again. Now move your hand from right to left in one fierce stroke. Observe the movement of the particles. Then wait for the particles to come back to a rhythm of randomness. Now move your hand from left to right in one fierce stroke. Observe the movement of the particles. Wait for the rhythm of randomness. Now wave your hands many times in any direction you wish. Observe the movement of the particles.

All one can see is what Brown observed: nothing can help us predict how particles will move in the next instant.

In motion

And so it is with the Indian stock markets. It moves in directions that few can predict. When more people are buying shares than there are people selling shares, the markets rise.

When more people are selling shares than they are buying, it declines. Those are the obvious effects of demand and supply. Like when you hit the particles with your right hand they will all swerve to the right but then, in a while, get back to the random movement.

But why do people buy and sell? What makes them act? It could be global cues, it could be local cues. And what makes those global cues important - or the local cues important? No one knows.

All of us “experts” have theories, opinions, views, formulas. Few survive the vicious movements of stock markets - over cycles. We can all be right for some time; rarely can we be right all the time.

It would be safe to say that the stock markets are in a Brownian motion when observed on a daily, weekly, or monthly basis. They move in any direction.

Experts and TV commentators know nothing. Their random statements try to match the random movements of the markets. Mostly with embarrassing verbal noise.

An underlying foundation?

At a company level, though, we could argue that there may be some pattern.  Maybe companies that have good businesses will earn decent returns over time - and these returns will result in decent share prices. Maybe. There is no guarantee.

A new product may come along; a new competitor may emerge who does the identical business more efficiently; a company may make some silly move like a bad acquisition; or the management running the company may end up being a bunch of cheats.

Even companies, over long periods of time, may no longer “dominate” and may fade away and fall to the Brownian principle of random movement. So it is possible that General Motors (GM) can go bust. Or that Century Textiles and Bombay Dyeing fade away from memory.

Or Hindustan Unilever is not the “must buy” stock in an India portfolio. Or that India is not Indira and Indira is not India. Or that watching daily TV business channels is not important for making correct investment decisions in the stock markets. Or that oil may be replaced with some other source of primary energy over decades.

But we don’t know much of this till we actually see the results. When we put forth a hypothesis in 2006 that India’s GDP cannot grow by more than 6.5% per annum over a long period of time, we were seen as heretics. Worse: as investors who had “lost it”. By the looks of it, all the well-respected economists are now “downgrading” India’s GDP to this. A particle moving in one direction at a particular rate may not be able to move in that same direction at the same rate.

GDP of 9% per annum is not a given - it would be for some years if we whacked the economy with a right handed fist of investing more on infrastructure and education. Like we whack the particles: they move faster for a while. India needs that whack to boost GDP growth for the next 10 to 15 years.

And then, after a decade of strong 9% per annum growth, maybe the GDP will level off to 6%, then 4%, then 2%, then zero…Like Japan.

Steady in unsteadiness

Looking over time horizons helps put things in context, in my opinion. But, yes, a 50 year view may be less relevant for most of us individuals. Maybe a 5 year and a 10 year view will help us look at the companies and the economy as particles in a steady state of unsteady motion.

Not as the highly-charged, rapid-moving particles once you have just whacked them with your right fist. And you pick your stocks and the companies you wish to invest in. And switch off many of the TV channels. And float in Brownian motion.

The moral hazard of morality

Moral-bashing or moral-flouting is a dangerous occupation. My recent column (Going fast) spoke about laws and morals. Driving fast, I said, was not a good thing. Well, ironically, I now have a speeding ticket! My first such ticket in 25 years from what I recall! On a recent visit outside India a few months back, it looks like I was driving beyond some speed limit.

The high-ground is a dangerous place to occupy. The low ground seems safer! And the slow lane less expensive…. In defence, all I can say is that I probably did not know the speed limit or see the signboard. But ignorance, I guess, is no excuse. Oh, well….

Source:  Brownian Movement