Memo 31 – Market View: Pessimism, Scepticism, Optimism and Euphoria!

Memo 31 – Market View: Pessimism, Scepticism, Optimism and Euphoria!

The roller coaster of 2020 is resolutely behind us – Covid concerns are fading, life is bouncing back towards normalcy, our favourite restaurants & our household help are back in action, government & central banks are providing unconditional support to the economy and, stock markets are at least 20% higher than pre-Covid levels! One may be seduced to think that it’s surely a party time for investors. Well, life is never so simple and we are seeing mixed investor emotions around us. We encountered below personalities in last 1 year:

The never again investor! The 25-30% fall in Mar’20 scared the hell out of this investor and they liquidated their stocks as soon as they reached break-even levels. It is highly likely that this investor will never come back.

The “bubble” investor! This category of investor is often well read, but falls easily for negative news. Their biggest rant is “economy is under so much stress but markets are going up, it is surely a bubble” and they sold out too early.

The bold & beautiful! Majority of them started their stock market journey in the last one or two years. Majority of them haven’t crossed their 30th Birthday. They like to believe in stories, and have no fear in buying companies with little earnings; companies with questionable business models as long as they feel it’s the “next big tech” company. Bitcoins and Teslas of the world are their biggest inspiration. Their performance of past 12 months will put seasoned fund managers to shame.

Mature but sometimes miserable! They have some understanding about risk & rewards, their time horizons are long and they majorly own good quality stocks in their portfolio. Their wealth too has soared in this rally, but they get bouts of misery because their stocks haven’t done as well as the Bitcoins & Teslas of the world.

To summarize, those who didn’t buy in the fall are sitting in regret, those who bought in the fall but sold early are also sitting in regret and those of bought & continue to hold are also somewhat in regret because “stocks they didn’t own” have done better. This investor behaviour opens doors to some enriching insights:

Insight 1: Markets are volatile, accept it and don’t try to time it
Explanation 1: If you entered the market for some excitement or making quick buck, the COVID fall and the subsequent rise would have caused a lot of anxiety. And it’s never easy to take good decisions when under the influence of anxiety. However, if you invest in equities to protect your wealth from ill-effects of inflation and grow it at a reasonable rate over the long term, you will likely experience lesser anxiety in bad times.

Insight 2: Average for a very long time is above average
Explanation 2: There is always some stock or some peer or some fund that is going to do better than you at a given point in time. The availability of information makes this problem worse and makes you feel that you were at striking distance of investing in the most popular stocks but missed it. It’s easy to feel miserable about what you own. The only way to overcome this is to remember your starting goal i.e. you started your investing journey to earn reasonable returns for a long time.

Economy & markets – high on hope & recovery

Stock Markets are clearly celebrating three things – that Covid pandemic was much milder than earlier predictions, that government & central banks across the world will continue the unprecedented support to economy and that the crisis will force economic reforms at faster rate. However, the market rise should not be confused with the economy.

While many pockets of economy have bounced back completely, sectors like fashion, aviation, cinemas, sports, films, hospitality, travel, retail, and commercial real estate have a long road ahead. However, one trend is clear across the sectors i.e. strong companies are getting stronger. And it is only the strongest of the companies that are listed on the stock markets.

This is not to say that the party will continue forever. There is definitely some pain in mid & small sized companies and will surface once the macro conditions start tightening. It is extremely important that you weed out the doubtful pockets and have minimum exposure to pockets of euphoria, because that is where you may lose a lot of money when the music stops.

From a longer term perspective, it seems that India will finally return to double digit growth rates. India will probably see massive investments in infrastructure, automation and technology. Apart from the usual consumption themes, the above sectors can see sustainable action.

Trivia – Doing well and still miserable!

We were caught off-guard when one of our investors asked for views on a little known gaming company called GameStock. Over the next few days it became a discussion point in even those whatsapp groups where discussing stocks was the 20th priority. The power of social media made everyone feel left out – that they missed out owning GameStock as its share rose from $20 to $400 in a single week. It’s a different matter that the stock had poor fundamentals and has corrected to $40 and more than 90% of the new investors have lost money.

The bigger point is that information overload has the power to make you miserable even if you are doing reasonably well in life or investing. As an illustration, internet give us insights into daily life of our favourite celebrities – how they exercise, what they eat, what they wear, how they raise their kids, how they party, how they vacation, etc. Suddenly, we don’t compare ourselves to Suresh who stays next door or Ramesh who sits in the next cubical or Anita who is a mid-age working mother! We start comparing ourselves with Milind Soman or Kareena Kapoor!

Nothing wrong in comparing ourselves with our ideals and trying to live like them. The only thing we need to be aware is what opens doors to infinite happiness also opens the doors to infinite misery. And an unaware mind will easily chose misery over happiness.