The Bull Market is Playing with Your Head | Mint – Mint

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Let me explain.  

You see, real wealth is created when you invest in anticipation of a bull market. This can never be said enough. And no one said it better than Warren Buffett: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

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commercials real estate properties.

You get in when others are fearful – i.e., in a bear market. And you count your riches when others get greedy – i.e., in a bull market. Simple.  

But then that’s Buffett. Mere mortals like us behave a little differently.  

Take the present circumstances for example.  

There’s been a surge in stock prices, primarily in the broader market, i.e., small caps and the like. This surge, which has been rationalised by faster growth, has taken place in an environment where interest rates have surged, and two wars are raging. Anything could happen. Yet, valuations are high, with little for risks. And despite this being the “greedy” segment of the market, money is pouring in. Tens of thousands of crores in the past few months.  

On the flip side, large-cap stocks – a segment dominated by “fear” – have seen money flow out.

I am generalising a bit here to make the point. No matter what we know about sensible investing, or how many times we quote Buffett, when the rubber meets the road, we tend to do things very differently.  

How differently? Let’s see the attitude of investors today:  

First, we are all perma bulls, always bullish. Nothing can come in between today and the dream of making lakhs and crores of rupees. If you are not a perma bull, well, you know what you are being put through already.  

Second, every dip is a buying opportunity. Implying that every dip is a mistake the market makes, and therefore a great time to get in.  

Third, since India’s growth story is guaranteed, the place to be is small- and mid-cap stocks, or SMIDS. SMIDS can grow faster for longer, so there’s more money to be made.  

Fourth, diversifying into gold and real estate for stability, or having bonds and deposits for stability and emergency funds, is for losers. If you are not into stocks, you don’t get the huge potential of the Indian stock market.  

This is the attitude that is shaping the investment environment in India. And who knows, this may work out in the end. But the question I want to ask is this: at what cost?

You see, given the way many investors are going about investing, it appears they are “all in”. And that’s not a good situation at all. The markets are priced for perfect outcomes – fast growth, in line profitability, perfect order execution, and capacity expansion, and above all, the elimination that anything will go wrong at the broader geopolitical or economic level.  

If you had bet on this idea years ago, then well, you are counting your riches today. Well done.   

But if you are betting on this with new money now, well, all you are betting on is that the expectations will be realised. And that means unless there’s a beat on these lofty expectations, returns from stocks will be muted.  

Let me try and explain this with a cricket analogy.  

At the start of the recently concluded World Cup, the cost of a base ticket to the finals, in the black market, was about Rs10,000 (actual price Rs1,500). A day before the finals it peaked at Rs35,000. If you had bought a ticket at the start of the World Cup, well, you had limited expectations on who would play the finals, much less who would win it. But if you bought it a day prior, well, you bet on a perfect outcome – i.e., an India win. Or rather, you just could not afford to miss seeing India win the world cup in person – FOMO!

Unfortunately, as it turned out, even though India played brilliantly all through the tournament, on the final day, we fell short. That hurt. In varying proportions, if you see it from a different prism.   

If you are a perma bull today, you are like the person buying a ticket at a huge premium in the black market today. The only way you will get to recover your money is if the outcome is perfect. Any deviation and you are going to be disappointed.  

On the flip side, if you are a Buffett-type investor, the person who bought way ahead of anticipation, well, even though the final result fell short, you would have got far more value for your investment. India reached the finals!  

This may not be a perfect analogy, or maybe it is, but it plays out all the time in our lives. If we can get a grip on this, we would already be better investors right now.  

Before I conclude, here are some ways to think about the huge India opportunity, and how to tap into it the Buffett way: 

First, remember you are buying a business, and not a stock. So, when investing, be sure to select the business carefully. It needs to be solid and needs to have staying power over the long term.  

Second, never overpay for a business. There’s a fair price, and that’s all you should be willing to offer. If the market does not oblige, WAIT. Don’t chase. 

Third, understand that in the long-term true wealth is created by having a mix of assets, including cash, in a proportion that is optimised for you. So no matter what anyone says, be sure to allocate. And allocate well.  

Happy sensible investing to you! 

Rahul Goel is the former CEO of Equitymaster. You can reach him at @rahulgoel477 on X.  

You should always consult your personal investment advisor/wealth manager before making any decisions. 

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