A Yogi Investor

Yesterday, Sensex crossed 54,000 and the day before yesterday, Nifty overcame the barrier of 16,000. We are in unprecedented times, where the market across the globe is touching a new high every day. This reminds me of some of the familiar characteristics of the market which are not normal.

• Equity market performance keeps beating other asset classes consistently leading to disproportionate allocation to the Equity asset class
• Projected Revenue far in future has become an acceptable criterion to value the company
• Interest in IPO has catapulted and many companies are fast-tracking DRHP filing for IPO to take advantage of the market sentiments. IPO is listing at substantial gain on top of expensive pricing
• More and more retail investors are getting attracted to the Equity market because they believe it is easy to make money in the market
• One of my clients in a Tier 3 city says that fellow residents are taking money out of their traditional investments and are investing in bitcoin for quick gain
• Smart investors are waiting on the sidelines for the market to correct but the market is not giving a heed

Well, this is not happening for the first time. It has happened multiple times in the past. The recent ones happened in the lead to the 2000 dot-com bubble burst and the subprime mortgage crisis in 2008. The behavioural state of the human mind decides the cycle of bull and bear markets.

The early phase of a bull market follows a bear market hence the learning from the previous bear market is fresh, the value investment resonates and people are cautious of taking undue risks. As time passes, the economy picks up. People feel more confident about managing their livelihood, disposable income increases and they start increasing exposure to the equity market but the representation is largely from the long term investors who do not believe in timing the market and continue to invest.

By the end of this phase, people completely erase the memory of the previous bear market. New Trends (e.g. Digitization, Renewable Energy), Technologies (e.g. AI, ML, Cloud, blockchain, EV), investment Products (e.g. bitcoin) and investment approaches (e.g. SPAC) take centre stage. People start believing in its potential. The value investment takes the back seat and the growth investment starts gaining momentum. People start giving higher premium to growth stocks. Valuation increases.

This gets the attention of the retail investors and their participation increases. They see quick gain in their portfolio. Their short success story becomes infectious and that brings all kinds of investors (e.g. first-time investors, commoners, next-door neighbours, homemakers) into the market. In the name of the investment, people focus only on return ignoring valuation. The rapid increase in the market valuation increases the market risk drastically.

One major negative news can create a huge imbalance in the market exposing all the fault lines. The fall of the market is always precipitous with very little or no room to manoeuvre. It would be very difficult for seasoned investors to react, let alone the retail investors. By the time, the dust settles, the long term investors could still be in the money but the short term investors will be in deep pain.

The market is a Maya (illusion). There are many distractions in it. The challenge is in controlling your mind so that you do not get attracted to the glamour and fancy of the market. Unfortunately, our mind has a natural flair for these attractions. It would require a conscious effort to gain control.

Do you have what it takes to be “A Yogi Investor”?

The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services.

He has advised many clients in India, the US, Europe, Middle East, South East Asia and Australia.

To know more about him, click on https://finmyn.com/about/.