Indian Stock Market Breaks 10,000

The time to worry about a speculative bubble in a market is when the prices have soared and no one is talking about a bubble. That is a perfect description of the Indian stock market these days. The Bombay Stock Exchange broke the 10,000 mark in trading last night while closing at 9,980, and the index is up 40% over last year. With an economy growing at 8% a year, this might be a good time to double check the seat belts.

There is no evidence that the party is over for India’s investors, whether from abroad or domestically based. One of the effects of a booming market in stocks is the attractiveness of equity investments. In other words, people who aren’t in the market see the profits being made, and they start buying. Increased demand always buoys prices.

There is a “but” in all of this, and it goes back to the old Herb Stein saying, “if something can’t go on forever, it won’t.” People who bought stocks in Indian entities a year or two ago are way ahead of the game. It might just be time for them to start booking profits, especially with the 2006 tax year ended in many countries. They now have several months to find alternative investments or shelters for their speculative victories. While the new money is coming in, the older wiser money may be moving on, and this will be disguised for a while as the overall demand will keep up for some time.

Ultimately, speculative markets go bust because the “bigger fool” theory fails to persist. Under pre-bubble and bubble conditions, people make money in the stock market largely because there is a bigger fool out there prepared to spend more to acquire the shares they are selling than they originally paid to acquire those shares. Eventually, there is no bigger fool. When that happens, speculators start losing money, and markets tend to fall faster than they rise.

Is India in this condition? Long term, Indian economic growth is almost a metaphysical certainty. However, the difference between an investor and a speculator is one’s definition of “long term.” Ten to fifteen years from now, India’s economy is going to be much larger than it is today. It could easily double. Whether it doubles by steady 7-8% growth is harder to say. It could tank, grow only 2% for a while and suddenly soar to 15% growth. A long-term investor won’t care. A speculator will drown in margin calls under the second scenario. Only when the market is still up and most people are talking about a bubble possibly bursting can one truly know the “all clear” has been sounded.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent.
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