Obsessed with bottoms

Have we hit the bottom in the stock markets?

These days people seem to be obsessed about finding bottoms. Television anchors keep asking so called experts about whether we have hit rock bottom and whether prices will now stop falling.

Some think that we made market bottom last friday. Others think that the bottom is not yet made. So far, the no-sayers are winning the battle as markets have kept going down.

Bottom seekers live with the hope that if the market bottom has been identified, they can start buying again and avoid losses.

But I have a few things to say.

First, bottoms can only be identified in hindsight. Much later than today, when we look back at what happened, we should be able to say whether markets did make a bottom on 10th October 2008 or not. Sitting in the present, it is impossible to call a bottom except by pure luck.

No one can spot a bottom except in hindsight, after it has been formed. Trying to find bottoms is a meaningless exercise, an exercise in futility.

Secondly, we invest to make money, not to not lose money. While not losing a part of the game, the basic idea is to make money.

So the key issue is whether we should be able to make money regardless of whether a bottom is made or not, identified or not. Even if we are able to call a bottom correctly, if prices do not go up after we buy, we are not going to make money. In fact, we would pay an opportunity cost of not having deployed the same money into other investments like say fixed deposits (which currently are offering 10-11% returns).

What we as investors should focus on is the prospects of gains rather than finding bottoms. If we think that prices are not headed up, it does not make sense to buy even if we buy at the bottom.

Look at the prospects of gains in preference to finding market bottoms. Keep observing the market with an open mind and look for signs that the markets are headed higher.

It is better to wait for a bottom and then let the markets tell you that it is possibily going up. This is an easier task and more profitable one than trying to find bottoms.