Over the past twelve months, financial markets have witnessed every bit of emotion. From despair to hope to euphoria, things have been like a Bollywood potboiler. It was an incredible year for your money. From a state of ‘fear’, we have swung to a form of ‘greed’. Stock indices are at a record high. So much so those traditional valuation theories like the price to earnings multiple are ignored. For businesses into new consumer technology, crypto assets, investors are willing to pay much more than those in the established sectors like consumer foods or energy.
This festive season, we must focus on the emotions within. They tend to drive our actions about money much more than knowledge. A new survey in the US, found that 58% of the people surveyed were affected by ‘recency’ bias while investing in 2021. That is a significant jump from 35% in 2020. Recency bias is the tendency to be easily influenced by recent news or developments.
What is driving greed
There is a hunt for assets that look ‘cheap’ in an otherwise ‘expensive’ market. Everybody seems to be hungry to make up for losses made in the past. The stock market is witnessing participation from individuals like never before. There is this urge to make quick returns. Investors have some high growth businesses to look at with the initial public offerings of companies like Nykaa, Paytm and Zomato.
There is already a buzz about these companies. The draft red herring document of Paytm suggests the possible reason your money should find a way to sectors that are expected to see exponential growth. Take the example of retail loans. The value of loans that households take in India is only 11% of the gross domestic product. As a standalone number, it makes no sense. However, when you compare it to China at 55% and the US at 75%, you know that it has the potential to grow.
That means banks and non-banking finance companies into retail lending have a secular growth prospect. A similar observation is in credit cards, insurance premium, stock market and mutual fund participation. There is a justification for the Nifty Bank index to do better than the Nifty index over the past year. That trend is likely to continue. Similarly, a lot is going on in other areas like IT services (digital transformation), consumer technology (mobile internet) and infrastructure (led by government spending) in India. The growth potential continues to make you greedy.
What is driving fear
The flip side to the ‘greed’ story are factors that stoke fear. A lot of money seems to be chasing fewer assets. The outperformance of shares like Microsoft, Apple, Alphabet and Tesla suggests that the wealth is concentrated in the top tier businesses.
In India, a herd moves from sector to sector and drives share prices to dizzy heights. First, consumer and pharmaceutical companies and then the commodity company shares. The Nifty Metal index over the past year has jumped 138%. Midcap shares are already up 80%, much higher than the benchmark indices like Nifty that grew by 51%.
The worry now is about the strength of that steam. A correction is lurking somewhere if you go by the commentary of analysts. Foreign and local players continue to remain steady net buyers, as interest rates remain low. However, inflation risks are real in India and around the world. At some stage, the easy money pumped every month into the global financial system will slow.
What it means to you
Greed is good, said Gordan Gekko, a fictional character in the ‘Wall Street’ movie in the 80s. However, a balance of greed and fear is the best approach. Your emotions cannot get better than the logical you. The money you put into your savings needs the direction of your goals. Investing with the hope of discovering a multi-bagger is a risky strategy even if you are in the business of finance. Diversification is the best way to deal with any potential situation.
(The writer is the editor-in-chief at www.moneyminute.in)