Money matters: Why investors should be fearful now

Legendary American investor Warren Buffett’s strategy of being ‘fearful’ when others are greedy makes more sense.
Express illustration.
Express illustration.

There are concerns across the board. As share prices soar to record highs each trading day, even the chief justice of India, D Y Chandrachud, felt it necessary to alert regulators in a public speech. He advised the Securities and Exchange Board of India (Sebi) and Securities Appellate Tribunal, the appeals court for Sebi orders, to ensure the backbone is stable.

Market pundits have put out innumerable reasons for markets to surge. However, legendary American investor Warren Buffett’s strategy of being ‘fearful’ when others are greedy makes more sense. He said that when others are greedy, you must exercise caution; when others are fearful, you should be greedy.

In financial markets that move rapidly during a single day, it is hard to pick the point at which one can start getting fearful and start selling shares at market highs. The idea is not to sell everything in your portfolio. It is to increase the cash component in your portfolio by selling securities that have already reached your target or have given you multi-fold profits.

Since prices in the financial markets are driven by greed and fear, it is impossible to take a contrarian view easily. There are too many reasons to buy more or stay invested. Despite record high levels, the Nifty index is not the best-performing benchmark in the world in 2024. US stocks and gold prices have done even better in the US dollar terms.

In India, the new coalition government promises more of the same policies. That is reflected in the critical ministries given to the same ministers as the previous government. Financial markets will await the outcome of the Budget 2024 on 23 July.

It is challenging for experienced fund managers to have access to top financial data to determine the top of the market. However, history shows that markets move up in cycles. While the overall trajectory of equity markets is up, there are top and bottom phases on the way. As an individual, you can’t identify the right point at the top. You need to figure that out based on greed and fear prevailing emotions.

It is very rarely in the history of financial markets that equity prices, gold prices and interest rates remain high simultaneously. High equity prices today reflect the hope of future profits. That seems to be driving retail money into equity markets relentlessly. Many individuals are buying into sectoral funds, hoping to generate higher returns. That puts fund managers managing those funds to buy those shares at a higher price than fundamentals.

Many companies in the mid-cap and small-cap segments are trading at multiple times book value or earnings per share. These levels are too high in historical terms. That makes equity markets vulnerable to a fall. Share prices need an excuse to correct themselves. High gold prices suggest that the element of fear is high.

Major central banks, including the Reserve Bank of India, piled gold to boost reserves. Investing in gold is driven by the perception of rising risks to the financial markets. Gold continues to gain ground in an era of strong US dollar and high interest rates. That is an unusual pattern.

The third key factor is interest rates. In the US, everyone is looking forward to a hint that the US Federal Reserve would offer to cut rates. However, with demand-led solid growth, inflation risks remain high.

The US Fed is unlikely to tinker with interest rates if US economic growth remains resilient. In India, the RBI monetary policy committee leaves borrowing rates unchanged. Despite several dissents in the committee, the RBI governor Shaktikanta Das has emphasised the need for price stability and risks to inflation from climate change and supply side issues.

While fund managers must invest most of the money as mandated by respective schemes, you can now hold more cash in your portfolio. You can wait for share prices to fall before entering at low prices.

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