Are you an investor or a speculator? There is a clear difference between the two but these differences get overlapped sometimes. As the markets have reached all time highs, there are varied emotions in the investment community. There is clearly a divided camp. Some are very bullish and others are cautious.
The rationale of the bullish camp is based on hope more than any apparent changes on the ground. Although there have been some good reform measures like front loading of Govt. expenditure in infrastructure, GST, creation of digital infrastructure and more but these reforms have a longer gestation period that would be visible in earnings growth rate after few years. On the international front, Trump’s tax cut plans and reluctance of central banks to taper quantitative easing has further emboldened market participants. They are excitedly predicting higher market levels and pumping in more money in equity market hoping for continuity of liquidity driven rally. Many ifs and buts are conveniently ignored in the current euphoria.
The cautious camp believes that the market has run beyond its intrinsic valuation. They believe that the share prices have zoomed without any reasonable uptick in earnings and most of the future positives are already discounted in the stock prices. There are no strong indications for increase in demand in economy since employment numbers are not encouraging and credit growth is tepid. Further GST is expected to result in a price shock as it will bring unorganized (non-tax paying) entities under tax bracket. This could impact demand for some period of time before people get adjusted to the new system. Globally, the problems in Europe and concerns regarding inflating Government debt in other developed economies aren’t going away easily and have potential to disrupt world economic stability.
Which bring us to decide which camp one would like to belong – Investor or Speculator? Well it totally depends on how a person would like to behave. Here are the behavioral aspects of an investor and a speculator:
Anyone can choose to behave like an investor or a speculator. Many investors get tempted to behave like a speculator at the market extremes. Those who can keep check on these temptations ultimately win the game of investments in the long term.
It has been observed that 70-80% of inflows comes when market are above its fair valuation because people put money looking at past returns and expect market will continue its run. That’s why majority of these people later get disillusioned from stock market following a crash.
Since no one can predict the market movements in short term, it becomes extremely vital for an investor to invest at levels which offer them margin of safety. This is the basic principal of value investment which ensures that it not only creates the potential for gain; it also limits downside risk. The bigger the discount from fair value, the greater the “margin of safety” an investment provides.
We thus continue to stick with our strategy of booking profits in mid & small cap schemes for existing investments. For fresh investments, we would wait for fair levels to take equity exposure, primarily in large cap oriented mutual funds. Till that time our focus will remain on protecting the portfolio from potential downside by keeping the funds in ultra short term debt funds.
On the debt side, disillusioned by low deposit returns, many people are shifting money to Debt mutual funds. Debt market is more complex than the equity market. Sudden surge in inflows has forced institutions to invest in undeserving debt papers. We therefore are very careful in selecting a debt portfolio for making investment to balance risk and return objectives.
We have famous names in investment community who behave like investors for instance Warren Buffet, Howard Marks, Seth Klarman etc. But we hardly know anyone who behaves like a speculator and is famous. So would you like to be an investor or a speculator? The choice is easy but difficult to implement.”
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