Where to invest? Is it the best time or worst?
A company with a Price to Earning of 400 makes an IPO, and the media pours all forms of blessings. This is one of the indications that we are in an irrational zone.
Let’s simplify this understanding. Assume that you plan to buy a brass Buddha. Your online and offline research indicates the price to be around Rs 10,000. If a shop sells it for Rs 15,000, it is expensive. On the other hand, if the price is quoted at Rs 10500, you may still decide to purchase. You can just sense whether something is expensive or cheap when it is far from fair value.
Similarly, extreme market positions can be indicated. For example, March 2020 was in a cheap zone.
Where are we now?
Markets tend to move in oscillations. Understanding these oscillations is key to investing. Unfortunately, most investors and advisors do a shoddy job understanding this critical aspect of investing.
Almost 300 years back, the concept of credit came into being, and the world changed. Until then, the risk capital was limited to capital contribution by the entrepreneurs. These credit cycles have a significant impact on business cycles. In turn, business cycles will affect profits and stock prices.
Due to the Pandemic, interest rates were lowered down throughout the world, including India. This is primarily done to spur growth. However, lower interest rates bring in the problem of ‘inflation.’
Enough said, where are we now?
On one side, we have seen massive profit growth in the last few quarters and on the other hand rising inflation. As a result, central banks will have to increase interest rates to counter inflation. Last year, a fall in the interest rates caused the markets to grow, and now an increase will do the reverse. I don’t know when, but it may not be too far.
The number of IPOs in the market is a clear indication of euphoria. In almost any get-together, the conversations are about investing. Old and young people are discussing how to make quick money in the stock market.
It is time to apply caution.
How do we apply this caution?
Reflect on your long-term asset allocation and make necessary changes.
1. Equity mutual funds: AMFI has asked a lot of cricketers to promote mutual funds during the T20 world cup. This is not a time to be influenced by Sachin or Rohit. Allocate in equities gradually and do not invest in bulk.
2. Debt mutual funds: There may be rising pressure of increasing interest rates. This may cause the NAV of long-term debt funds to fall. Therefore, you should stick to short-term debt funds.
3. Gold: Gold is a good inflation hedge. 5-10% allocation may be excellent, but short-term pressure would continue.
4. Real estate: Real estate investment, as well as rental income, can be a good inflation hedge. In addition, REIT investments can be evaluated given that the economy is now opening and employees are returning to offices.
Now my favorite topic, investing in direct equity.
The first question is, why do you believe you have an edge investing in direct equity? Simply speaking, what makes you think you can pick a stock and the odds will favor you. But, of course, there is a difference between belief and wishful thinking!!
I find it quite amusing when 20-year-olds offer me advice on stock investing. The dopamine has flown way more than required :) Ghalib once said, ‘koi batlaye ki hum batlayen kya.’
Unless you can create a concentrated and contrarian portfolio of stocks, the probability of beating the market is minuscule.
A lot of investment professionals feel that they can beat the market. But, unfortunately, very few can consistently beat the market, and those who do will eventually make a lot of wealth.
The qualification has a minimal role; it is more a behavioral game. Stock Investing is a humbling career option and should be seen as a game of probabilities.
You should stick to areas where you think you have an edge. You can continue to increase your knowledge but always be aware of the edge. If you operate outside this boundary, you will be vulnerable to market forces. Last year, these forces helped, but now the same forces can crush.
The Law of Impermanence is the teaching that everything in material or relative existence is impermanent. That is, everything has a beginning, a middle, and, most definitively, an ending.
Nothing is forever.
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