In the long run we are all dead: Importance of Profit Booking

Couple of days back, somewhere I read that Dow Jones was @ 7000 in 1997 and in march this year it broke that same level. So over a decade the return on Dow Jones is nothing? That does not mean Dow Jones has not gone beyond 7000 range at all! It went up to 15000 levels in mid 2007 from where this present crisis started and with this Dow Jones also started falling.

For your reference I am providing a graph of DJIA (Dow Jones Industrial Average) Index below...


And if you observe the above graph Dow has touched 1997 levels somewhere in 2003 also.

Not only Dow Jones, but if you take our Indian Stock market, it faced bear market for almost every 4-5 years for different reasons.

If you see the below graph where in I have mentioned 4-5 broad bear markets...


In every bear market, market came down almost 50% of its previous peak respectively each time. For example in 92 due to bear market crashed from 4000 odd points to 2000 points, in 2000, market came down from 5500 odd points to 3000 points & if you take the present crisis here also market came down from 21000 points to 8000, more than 60% here.

This is the story of index & index dependent funds. Now if you consider some high beta stocks which moves erratically on both up as well as down side then think about them with respect to above crashes or bear market situations.

Bottom line:

So here what I am trying to say is at certain times booking profit is very necessary from stock market point of view. And even well known economist John Maynard Keynes also said that only: "In the long run we are all dead".