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Over the past few weeks this is a perpetual question being posed by many investors regarding the all-time highs that Indian stock markets continue to post on a regular basis. Many investors have made substantial gains over the past couple of years that outstrip the average return in our markets over any reasonable period of time and hence the question. This is indeed prudent to take stock of the situation and ponder if these arguments are valid.
First of all, the answer to this question depends on who is asking. Is the question being asked by long term equity investors? Short term investors? First time investors? Asset allocators? Asset rebalancers? Foreign investors?
The answers for all these groups of investors may vary. Skittish short term investors who do not have patient capital and are either leveraged or have entered the market on momentum typically should revisit their case. This is based on the fact that markets tend to auto correct over time and if the uncertainty is psychologically demanding (i.e. fear of loss, however notional, is unacceptable) then it would possible be safer to stay out of the market, be happy for the gains of the immediate past and allow the markets to either go up even further from here or allow it to do whatever it does with no skin in the game.
If asset allocators and rebalancers are asking the question, there is reason to believe that such re-allocation, if exceeding their risk threshold due to increased market valuation, should be adhered to as a process.
Foreign investors do have a choice to invest else where and other markets may appear cheaper, however growth is a given in the Indian markets. With increased weight in indices compared to 5 years ago, they may want to stay put, albeit underweight.
For long term investors buying into the India story over the next decade, to grit ones teeth (in case of turbulence) and stay invested at this time, like in all other times.
Timing is great in hindsight but very rarely executed
While it makes for a great story to say one exited when the markets were overheated, it is never a sure thing and the markets can continue to remain overvalued over a long period of time eroding significant opportunity value if one remains out. At the same time they may remain stubbornly unresponsive to reason and logic beyond an investors ability to hold. It is for each one to take a call depending on their risk taking ability. As a trader once said “don’t let brains come in the way of a bull market…” (Anon)
Mr. Tushar Pradhan
Chief mentor, Investment Strategy
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