When the arch bear turns bull, it is time to start worrying in the stock market! Thus goes the saying. Suddenly, everyone has tips and multi-bagger ideas. This is a clear warning sign that a correction is due.
Sensex has crossed all time high level of 32,000 (a growth of 19% + YTD) without any change in economic fundamentals. Indian markets are not the only one rising; all markets across the world have been lifted in the flood of easy money and hope of continued supply of liquidity in the near future.
All concerns regarding global slowdown, systematic issues in Euro zone, trillion of bonds at negative yield etc. have been conveniently brushed aside.
A typical bull market has three phases: optimism phase, that marks the end of a downtrend and smart investors start lapping up shares at cheaper prices; excitement & thrill phase, when risk appetite develops among the general public and retail investors jump in the market; and the euphoric phase, when the bullish sentiment turns into exuberance; smart investors start reducing the equity exposure.
In the present scenario, retail investors are already crowding Dalal Street either through mutual funds or direct equity participation; repetitive ad campaigns of domestic brokerages & mutual funds; and flurry of IPOs signal the undercurrent of the euphoria in markets.
However, going against the tide is extremely challenging. To book profits in euphoric market or to make investment in panic selling requires lot of courage. Buy low and sell high is easy said than done. Thus we talk about patience in investments. Patience is not about waiting, it is about how you behave while you are waiting.
Money can be made in equity market when one has edge in following – Information, Analytical & Behavioural. The information edge is now more or less gone with tools for quantitative analysis and wide dissemination of information by management. Analytical edge is also somewhat diluted with many smart investors involved in the game. The most valuable and scarcely available edge is behavioural one and being patient in an age of distraction and immediate gratification is at the core of this edge. Being patient is therefore not just a moral imperative or something you need to do for the good of humanity, but is a logical necessity to do well in the market in the long run as a value investor.
Bull market when treading towards the peak throws lot of challenge for an investor who despite knowing that market valuations are expensive has to guard himself from psychological pressure created by herd mentality. As Benjamin Graham said “Even the intelligent investor is likely to need considerable willpower to keep from following the crowd”
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