Live Chat Email Us Call : 011-42563333

Did the FII cause a market decline?

Or, maybe, markets just fell since smart money was selling because they wanted to buy at lower levels.

The Narrative Fallacy: search of an explanation for everything

The narrative fallacy is an idea that we constantly search for an explanation for everything, because it gives us a sense of comfort.

Nassim Talib introduced this thought in his book: The Black Swan. I am summarizing what he wrote:

Explanations force a logical link for an event. They bind facts together. They help make sense of an event. But this method goes wrong when it provides, what could be a false reason, for events that were uncertain in the first place.

Let us take the example of the recent stock market decline. The Nifty fell from 12,000 to 11,200 in two weeks. TV journalists have given us a simple reason: The FII’s did it! They got annoyed at the higher tax on personal incomes, which inadvertently affected some of them. Now, they are selling out! I have already heard forecasts of impending doom from analysts who have been bearish since the Nifty was 900. This time, they assure us, it is real.

Now, what do we have here? An explanation for the decline. We are very uncomfortable if an event happens without a reason which we understand. So, we have put a reason for the decline. (And, found the Villains: FII and the tax change!)

But, look at the market from another point of view:

The Nifty had a straight line rally from 11,100 to 12,150. Perhaps there was a reason for a correction anyway.
Maybe the market is discounting a lower growth rate, or, no rate cut in August, or, problems in the NBFC sector.
Or, maybe, markets just fell since smart money was selling because they wanted to buy at lower levels. If you are bullish on the market, it is smart to sell in anticipation of more buying at lower prices.

My point is: many events do not lend themselves to simple or even complex explanations. We should just accept the event as it comes about and plan our investment strategy, fully understanding the uncertainty of markets.

Leave a Reply

Your email address will not be published. Required fields are marked *