Exuberant markets: Time for a reality check

The party in the stock markets seems to be lasting forever. Recently,  a two-wheeler dealer with less than ten employees received bids worth Rs 4800 cr for a Rs 12 crore initial public offering (IPO). Retail investors’ enthusiasm for Indian stocks is only increasing, blinded by double digit returns but they seem to be oblivious to the risks. With the registered investor base in NSE crossing 100 million, Indians are truly in a stock market party mode. 

One routinely hears of people quitting (or wanting to) their job to trade. Homemakers and retired individuals, traditionally the more risk averse lot, along with the youth are moving savings to stocks in the hope of doubling their funds quickly. Stock trading courses are much in demand and people are even taking loans for investing in stocks. Unrealistic returns’ expectations are leading to irrational exuberance. But the party won’t last forever and it is time to take a reality check. 

Remember, luck favours the well prepared. Of course, in these markets, it seems luck is favouring all. Those preening over massive gains forget that it is the luck of being in the market during the bull phase  and not skill that has got them here. But luck will not last forever and it is rational thinking and research that will work in the long term. Those who are thinking of quitting jobs may want to recalibrate their decision.  

Even investors moving funds from fixed deposits or taking loans should reconsider their strategy and keep in mind that markets always revert to the mean. Stop expecting a linear 20-40 per cent annual return. At best on an average, equities can yield 10-12 per cent per annum in the long term with some years being good and some years being bad.  The arbitrage of borrowing at 9 per cent and investing at 12 per cent or moving from a 7 per cent deposit to 15 per cent in equity, does not work because markets do not only move one way - upwards. 

In fact, 60 per cent of Indian investors, who have largely entered the markets in the last 3 years, have never seen market crashes. Public memory is short and few recollect the past crashes. Social media only highlights good stories and no one talks about bad experiences. Investors are losing huge amounts by entrusting their funds to online platforms, phone  groups and known individuals in their circles. Very few investors complain against these entities formally after being duped of their capital. As a rule, only invest through regulated and professionally managed entities like mutual funds and do not fall for any high return schemes from unqualified entities.

Investors should evaluate their portfolio to check if they are comfortable with the 

debt: equity allocation. With markets being at peaks, it is a good time to exit those investments which may have been invested based on peer pressure and those promising high returns. Investors should earmark each investment to a goal and be certain that they can hold equity investments for at least 7-10 years. Exit investments which are not in line with goals. 

It is time to put on the rational thinking cap and stay away from those trying to sell high returns.  “Chasing gains is the best way to end up capturing losses,” Jason Zweig, financial journalist and the WSJ columnist has pointed out.