We are in a bull market, globally and in India. The mother market US is leading from the front with the Dow setting a new record, crossing the 40,000 mark. Nifty has tripled from the Covid low of 7,511 set in March 2020. Many stocks have turned multi-baggers in a short span. The impressive returns from the market during the last few years, beating returns from other asset classes by a decent margin, have led to explosive growth in the number of demat accounts and the AUM of the mutual fund industry. This is a desirable and healthy trend. However, this growth has a soft underbelly. There are many excesses and undesirable trends that can negatively impact the market in general, and the newbie investors in particular, unless restrictions and restraints are imposed.
The regulator SEBI has been warning regularly about the excessive speculative trading in the derivatives market. It has been widely advertised that nine out of ten derivative traders are losing money with an average loss of around 1.1 lakh a year. The regulator has introduced many restrictions on speculative trades. Sane voices in the industry also have been warning the newbies against excessive speculation. But the warnings and advice have fallen on deaf ears. The newbies, driven by greed, and encouraged by many newly sprouted finfluencers in social media, are speculating and gambling with gay abandon. If past experience is any guide, this speculative frenzy will end in tears for many. Prevention is better than cure.
There are some unhealthy and undesirable trends in the investment segment, too. The normal pattern in stock valuations has been inverted now. Normally, as we move up the ladder from small and microcaps to midcaps and large caps, the valuations also move up. But now, as we move up, the valuations come down. Midcaps are trading at a premium to large caps and small caps are trading at a premium to midcaps. This inverted pattern of valuations is an aberration and is unlikely to last long. Bull market is not permanent. During a bear ambush, the small caps will get slaughtered, and the retail investors chasing the momentum driven stocks in the broader market will lose heavily.
This is not to suggest that small caps should be avoided. It is a fact that small and midcaps outperform the large caps in the long run. So, systematic investment in the broader market, ideally through SIPs, should be an essential ingredient of the investment strategy. The suggestion is to avoid the mid and small caps driven by momentum and not fundamentals. Now, we can discern a distinct difference in the investment strategies followed by seasoned investors and the newbies. Seasoned investors are investing for the long-term in quality stocks giving priority to valuations. Newbies are chasing the mid and small caps being driven by momentum and worse, they are buying at any price, throwing time-tested valuation norms to the winds. Many stocks with low floating stock are going up 5 to 6 percent very frequently. Mere news of order wins are driving stock prices significantly up. Newbies are chasing this momentum. It is important to understand that momentum trading doesn’t create wealth; value investing does. Earlier the newbies realize this, the better for them.
