Peter Lynch the renowned Investment Guru once famously remarked that not everyone has the Stomach for Risk and that those susceptible to making panic sales, should not have invested in Equities (be it stocks or mutual funds) in the first place.
Volatility during 2024 was anticipated by many of us at the turn of the year given the huge increase in inflows into mid and small cap stocks and mutual funds. Hence, I am surprised how much last week’s sell-off across several mid and small cap stocks spooked some market participants. It came out of the blue and set the cat among the pigeons, so to speak, at the Indian equity markets.
The decline in indices seems largely triggered by the Foreign Institutional Investors (FIIs) booking profits, expecting the market to cool off and factoring in the worst-case scenarios that could play out in India. So, what happens if that scenario does not play out and the inevitable damage is lesser than anticipated?
Once the dust settles, will those FIIs be back, sooner rather than later, on a buying spree and will that trigger a sharp surge in the Indian indices? Time alone can tell, though if I were a betting man, that is where my money would be. When that will happen, if it does, is the tougher question to answer.
For a long, at the guest lectures I conduct at B-Schools I have spoken to the students about the difference between linear and lateral thinking while investing in the bourses. Back at my place of work, we interact with a fair number of well-educated High Net worth Investors (HNIs) patrons from urban areas across the globe, who have expectedly discussed the state of the market and the road ahead with my team. Most of them have even decided to top up their investments via the SIP / STP route which, I believe, is an optimal linear decision.
A few of our HNI patrons hail from rural areas across India and what they lack in terms of educational ‘labels’, they more than makeup with their lateral thinking ability to sense a killing whenever the opportunity presents itself. A couple of them always surprise us by simply asking to invest fairly large sums via the Lump-Sum route, sans any queries on the state of and outlook for the equity market.
As a matter of abundant caution and professional compliance, my team did explain the pros and cons of making lump-sum investments and that too in a market that seems richly valued for the near term.
Well, their line of thinking was simple. The investments they were making were for their next generation and with that kind of time frame of a decade in hand, they were confident that the returns would be handsome. Given that kind of clarity of thought, there was little left to debate.
Linear or lateral thought, it is the ability to ride risks and with immense patience, that separates ‘few winners’ from the ‘many also rans’ in any equity market.