Should investors become fearful now?

Wed, 26 Nov Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

Rewind back to the middle of 2013. Everything seemed to be going against India. Inflation was raging high. The economy was slumping to the lowest growth rate in a decade. The widening current account deficit prompted the Indian rupee to go into a free fall. Policy paralysis and the burgeoning fiscal deficit further dampened hopes of a recovery.

This was a time when everyone seemed to have written India off their investment list. There was widespread pessimism about India's future.

Now the problem with most people is that they tend to follow the crowd. If others are exiting the markets, no one wants to appear a fool holding a bunch of stocks that others are throwing away.

But as you may have experienced, stock markets can be quite funny a lot of times. And the joke is almost always on the retail investors. Later in the year, the markets began to surge. Many thought this was an opportunity to make a quick exit before the markets tank again.

And this is probably the worst mistake investors would have made because since then the markets have simply been ascending higher and higher.

Here is what you probably missed out if you exited from stocks last year...

As per an article in Business Standard, 428 of the 836 stocks in the BSE 500, BSE Smallcap and BSE Midcap indices have doubled in the last 15 months. Mind you, these 836 stocks account for 97% of the total market capitalisation of all BSE-listed companies. So if you had randomly picked up a bunch of stocks from these indices, there were good chances that one of every two stocks you owned would have doubled or more in just 15 months. Even if you would have invested only in BSE-Sensex and NSE-Nifty indices, your stock portfolio would have been up 60%.

This just goes on to validate Warren Buffett's easy-to-understand but difficult-to-implement mantra: "Be fearful when others are greedy and greedy when others are fearful."

So now that everyone seems positive on India, is this time to get fearful and exit stocks? While stocks have witnessed a sharp surge in their prices and valuations have gone up, the markets do not seem irrationally priced yet. Yes, it will be difficult to find stocks at deep discounts in the current scenario. But investors should definitely look at buying quality businesses at a fair price. However, if you have bought stocks with sky-high valuations that do not match up with the underlying fundamentals, then yes you should certainly be fearful.