Even as we gape at the sudden surge in the equity markets and wring our hands in despair about an opportunity we may have lost, it makes sense to reflect a bit on the past. First, if we did not know the top of the market in January 2008, we are equally unlikely to know the bottom. Second, if all the experts in the world could not tell us that a deep crisis was looming over the global markets, they are unlikely to know how and when the crisis could have blown over. The back-to-basics approach of looking out for good stocks and buying them at corrections, not after rallies, will always help us enhance our long-term wealth.

•What does this surge mean?

Every bear market is interspersed with rallies. Investors tire of sitting out after a crash and begin to believe that the worst is over and in a collaborative auto-reinforcing action, begin to buy. A bear market bottoms out not because investors desire such an event, but because the real economy has completed its cleansing act. The optimists will point out that the fiscal stimuli across the world has prevented a collapse of the financial system and that the beneficial lag effect of rate cuts needs to show up. There is merit in this argument. But the next level of change has to come at the level of businesses.

•What’s happening to businesses?

We need to see companies and banks cleaning up their balance sheets, reworking their strategies and looking better than they did when the crisis began. When the going was good, every business extended itself. Expansion plans that seemed realistic then now look stretched. When the crisis broke out, the first set of businesses to fail were the ones that ran out of cash — it was not the collapse of the market or demand that led to their fall, but the simple non-availability of cash. Now that cash and liquidity seem to have returned somewhat to normal, it is easy to believe that businesses will turn around. The truth may be harsher. Longer-term solvency is a different issue compared to shorter-term liquidity. To the extent that businesses chased short-term growth spurts with scant regard for long-term sustainability, it will take a longer time for them to rework their strategies. The rally in the markets masks the difficulties that several businesses are facing in getting back on track, and that is the weakness of this rally.

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