The 10 mistakes to avoid when markets are nearing the all-time record highs

The 10 mistakes to avoid when markets are nearing the all-time record highs

It is important to be optimistic but be cautious, aware of the dangers and be non-judgmental even when the world around you believes that this time is different.

In the long term, everything runs on fundamentals, without exception. However, in the short-term the entire system is driven by insiders and operators Guptha says.

The joy is evident. Anchors from the most popular TV stations have already printed T-shirts that read “Nifty – 21000”. The Nasdaq is expected to surpass its highs (or at least, it did just two days ago) within the next few days, and it has never been more perfect time to be convinced that “This time it’s different”.

I’ve been in the markets since 1993 and, like many 50-year-olds, have witnessed a few booms, scams, busts and financial crisis. As a fund administrator, often my clients ask me: When the markets are at their highest levels and setting new records every day and you are not investing your money instead of keeping cash.

 

I give my clients two options You can either take back their money or just be patient. However, I won’t change my approach because of the pressures on capital expenditure.

While I’m always completely committed (personally) in the markets (levered at 120 to 120 percent) I am always nervous, because Socrates continually tries to knock on the subconscious of my head by quoting his quote: “Fools are always confident, and the wise are always in doubt”.

Perhaps I’m a angry bull dressed in bear-like clothing. The bull within me keeps me optimistic and the bear in me enables me to be cautious, aware of risks, and not be apathetic while everyone else is certain that is different. It’s possible that’s the reason our portfolios are the most stable and have defeated markets with the lowest number of heartbeats for our clients in the long-term.

However, my top 10 learnings (and the bonus) I’ve absorbed throughout the years and attempted to implement into my investment style are as the following.

1. Be bold, not foolish.

In the event that our world keeps advancing and needs to keep progressing (with technological advancements, inventions potential, AI, et al) markets will continue to rise in the long-term. This allows us and inspires us to become perma-bulls like Rakesh Jhunjhunwala. Sensex at 60,000 seemed impossible 10 years back. Today, it’s 66,000. Therefore, being a bull always pays off in the longer term.

 

However, in the short term being a masked smuggler at the mercy of journalists is the most severe punishment one can be afflicted with. The stories that come out in the wake of the market are close to being deceiving and suicide.

Lesson

If a particular stock, idea or a particular sector is being aggressively promoted Avoid.

2. Breakout stocks

Influencers offer paid classes on breakout strategy and countless gullible retail investors fall into this scam.

In the long-term all things are driven by fundamentals in every case (or otherwise Yes Bank wouldn’t have become an No Bank and Suzlon would remain an blue chip) In the short-term the entire system is driven by insiders and operators. What is the reason that shares begin to gain or go down right before the announcement of a major corporate event? There are many examples, and not just in Indian markets, but also in the US too.

Stocks go up, but not because companies are extremely savvy. They are triggered because excessive money is chased by the wrong stocks. That can cause any stock break out. Companies that are less than Rs 1,000 crore who are suddenly able to create new narratives around them, and the continuous advertising of ‘the latest promise of Lala land on social media and occasionally through business-related channels usually are scams and ruiners of wealth. It’s not surprising that most breakthroughs occur only at times when markets are at their peak.

When Infosys, ICICI Bank, or any of the others, are able to break out, it’s wonderful and warrants your attention. However, when stocks are able to break out due to or because of good news (in the majority of cases, planted) when promoters are taking their stakes off the market it is not enough to be concerned however, you should think about staying out of the markets for a few days. In the words of Warren Buffet famously stated: “Only when the tide goes out do you discover who is swimming naked”.

Lesson

If you’re a superhero and are able to board the bullet train (that’s going towards the deep abyss) and then get off it in a flash an investment strategy that is breakout is a good idea. In other words, you’ll probably be burned.

3. Beating the expectations

If rivers begin to flow above the danger level the authorities do not seem to care about the flow of the river or the imminent danger. They simply raise the danger mark several feet to ensure the river stays at or below the danger level. That’s the way it is with the estimations made by analysts. Every estimate is always undercut because estimates do not base upon free cash flow (FCF) or earnings yield but on collective wisdom of sub-optimal and mostly inexperienced analysts who are masters of the art of guesswork.

In some cases, estimates are not met due to a low base effect, a one-time income and so on. To determine this, it is necessary to look to the financial records. But beating estimates is among the most flimsiest claims to confuse those who Do It Yourself (DIY) as well as the ignorant investor.

Imagine Nykaa that was listed for sale at a value of about Rs. 16,000 million (nearly 15 billion) and analysts declared it a profitable business going into its first public offering (IPO) and the Nayars took their profits in private and shared the losses. Its current profits per share (EPS) is about 7 paise, and it trades at a 70 percent discount to its IPO price. The price is discounted by an astounding 2,200 times.

Over the long-term There are only three factors that are crucial to a solid performance of a stock that has a possibility of creating capital gains for investors. They are: Value, Free Cash and the Management Plan.

Lesson

Keep to the core rules of investing which have been in place for a long time. Analysts and their forecasts are fun, but not the foundation of sound investment strategies.

4. Feeling happy about the bad news

Poor data is not good, and good data is better. But, markets are now interpret this in a different way. Imagine that in the event that US employment and inflation numbers are positive, markets will respond to negative data and vice versa? In the end, real-world data will come in and markets will see that job losses aren’t a good thing over the long haul, since the data is ahead of to reality over a period of a few months. In the short-term the bad news usually is a positive for the market until it does not.

Lesson

If you believe that the information is accurate take it as a fact and not the fanciful interpretation. (eg. bad data could cause interest rate reductions as well as the celebration of excesses will not stop). In the end, anything that’s beneficial in the world economy is likely to turn as good, while the opposite will be manifested accordingly in the near future.

5. The future is discounted in the present valuations

The choice to incur a capital expense by a business or create a new manufacturing facility or acquire a brand new business agreement that is spread out over several years is almost always a catalyst for bringing the price of stock to new levels. The human brain is built to be euphoric about news that hasn’t produced one cent to date and nobody really is sure when it will happen – These traps should be avoided since euphoria is almost always wiped out. Are you aware of the infra theme from 2006-2008? A lot of those companies aren’t in the list in the present. The current defence theme isn’t different. Be wary of the future of stories.

Lesson

If a company is prosperous and profitable, it will continue to create constant shareholder wealth. Any sensible investor will be able to make profits throughout the life of the company. (Buffet was so tardy in investing in the Apple’s lifespan – and what’s more, he didn’t miss any opportunity or bus.) Don’t make investments based on the hope of a bright future. Be patient and wait for the right time.

6.The FOMO effect

The past is full of instances, and I’ve been there personally. If you are truly passionate about a stock and is looking to build an investment plan, the desire of watching TV newscasters and news reports is awe-inspiring. However, almost always all the stocks you are looking to purchase currently will be available in a price that is a little lower within a few weeks, or even months from now regardless of whether it’s an investment in the HDFCs as well as the Bajajs that are the most popular in the market. All you require is some patience and perseverance to increase their conviction until the price target or lower is reached. In the event that fear of not being able to catch up (FOMO) can be measured in a direct proportion to the amount of indexes. Most bitcoin retail aficionados invested between $50,000-68,000. If Bitcoin is a true storage of worth, then why don’t they double down on $20,000?

Lesson

The investment decisions made while in a state of FOMO aren’t the best idea. Start by identifying your stock, get it better, watch your stock over a couple of weeks before deciding to buy it. There is no way to lose.

7. Recency bias

Anyone with vivid memories of the years 2000 and 2009 and can remember Pentafour Software, DSQ, HFCL, Global Tele, and JP Associates, would resonate very well with the dangers of the recency bias. The shares of the companies were down in value from (approx.) the Rs 3,000 mark by 20%, many people tried to sell their real estate and silver to profit from the chance to own the blue chips of the era. In the end, all the companies were taken off the market, and JP has now reached an incomprehensible level of around 8.

It is important to keep in mind that a stock valued at 1,000 rupees could soon turn into a penny stock and the old adage “how much more can it fall” is a sham.

Lesson

You shouldn’t only not fall victim to a knife and avoid investing in stories stocks. Businesses that sell stories but not profit will always squander the wealth of their shareholders.

8. Herd mentality

Chemicals for speciality were as popular an industry 18 months ago the way banking is today. Influencers were permitted to unabashedly promote their own narratives on television channels and the entire industry has been destroyed in a significant amount of in the past two years. Indian banks are trading on fairly high valuations whereas their chief executives (CEOs) of these banks are slyly signalling red flags about margins and growth. However, they are not able to stop the BAAP (buy regardless of price) brigade is unstoppable. The banking sector is the foundation to economic expansion in every country however, the valuations are important.

Lesson

If everyone is following the same thing It almost always leads to trouble. DotCom during the decade of 2000, and housing in 2008 met the same result. AI is now the hottest trend. Let’s examine the results for AI as well as chip firms in a few quarters in the future.

9. cutting the flower and then watering them

Peter Lynch famously said the above. I have more than dozen individuals who’re enthralled by Yes Bank and Vodafone rather than ICICI Bank and Bharti. Many DIY investors believe that the odds that a penny-stock double is much higher than the chances of a reputable and well priced stock. The “averaging in the process of going down brigade consisting of Yes Bank, Unitech, and JP Associates will continue to sell their winnings while accumulating piles of garbage.

In the end, these investors are exiled from the market for ever.

Lesson

The company’s performance is measured in numbers, the numbers are reflected on the balance sheet, and the balance sheet is reflect in the price of stock. Stocks are in the market because of a reason. A red-black roulette table gives you a greater odds of winning than hanging on to all the Yes’s as well as the Vodafone’s around in hopes of a springing miracle.

10. Infatuation with promoters or stocks

It was interesting to hear a renowned fund manager mention on the podcast that the manager was in awe of Ghosh. Ghosh and Bandhan Bank. The adulation for a specific management made him unable to recognize the company’s fortunes were turning to the negative at the bank. In the end the bank had to close the fund at a huge loss to the investors.

It’s easy to get in love with certain sectors and stocks which have yielded excellent yields in recent times. But this should not deter one’s thinking about the evolving times. A prominent TV host is constantly promoting the notion that what will be the new HDFC Bank is the HDFC Bank it self, whereas the stock has underperformed Nifty by a significant margin over the past 2.5 years. ICICI Bank snatched the mantle of consistency and growth in the Indian banking sector.

Positive commentary on management is another trap that investors fall for. Bias affects their judgments and also their performance. Most investors are content with just a few comments. What promoter would ever declare that his future is not so bright or make a negative comment?

Lesson

Do not cling to stocks when the data or price is positive or when an organization’s business plan might suffer a setback. If you can try to cling to friendships with great friends, feelings, not stock prices and the commentary.

Bonus: Ensure that you are checking the price and not the value

Everyone wants to improve our living standards (car home, residence, holiday destinations and so on.) and are willing to pay more for better quality and larger. Some of the more prudent investors, and often fund managers, too are tempted to invest in subpar and low-cost stock (penny stocks) hoping for an enthralling turnaround or a tale that’s bound to unfold in the near future. The tendency to engage in this strategy of investing is directly related to the index level.

Lesson

If there’s a one percent chance that your investing behavior seems to be a bit similar to gambling, then you are likely to end up in trouble. The chance of securing on a multi-bagger in the midst of bad stocks is similar to finding a unicorn among the midst of a donkey herd.

If you could stay clear of mistakes in the investing journey for a long time there’s nothing to stop you from building your wealth at a significant rate. Compounding – the eighth wonder of the world – is everything does it not?

(Manu Rishi Guptha ) is the fund manager most well-known for his sharp and insightful commentary on markets and the stocks he owns. He can be reached via @manurishiguptha. The views expressed in the article are his own and do not reflect the views of the publication. )

CATEGORIES
TAGS
Share This

COMMENTS

Wordpress (0)
Disqus (0 )