Every bubble attracts small investors in hordes and leaves them much poorer. The bubble has a tendency to grow fast, making people richer at a rapid pace during the growth phase.
If you are a small investor, avoid risky assets which include crypto, Bitcoins, NFTs, new-age companies with very high risk-reward equations (a few winners are multi-baggers and many losers are zilch makers).
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All asset bubbles are different. All of them ultimately burst. The bigger the bubble gets, the more painful the burst is for investors. Every bubble attracts small investors in hordes and leaves them much poorer. The bubble has a tendency to grow fast, making people richer at a rapid pace during the growth phase.
In the current market, there are a couple of facts that are even more worrisome. First, for crypto, there is no underlying asset; so if this is a mania then it’s not even asset-backed. Second, millions of millennials have been drawn into crypto and markets for the first time. So they have till recently not seen or felt a bear market. There are optimists who believe that there will be no long-term bear market and corrections will be short-lived.
There have been times in the market when irrational exuberance lasted so long that money managers talking rationally lost their jobs and some of them did not live long enough to see that their disbelief was justified.
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Coming back home, in recent times, many new-age stocks like Zomato, Nykaa, Fino PB, PB Fintech, PayTM, Data Patterns, Latent View Analytics, etc, made their stock market debut. They have corrected and a few have dipped well below issue price. Foreign portfolio investors (FPIs) also participated enthusiastically in the IPOs with more than $11 billion getting invested in IPOs. It appears they sold their holdings in the secondary market of old established companies. Till some time back, by and large most IPOs performed well post listing and optimism kept feeding on itself.
As per one study, Indian markets are at almost 85% premium to an average of 13 other emerging markets whereas historical premium has been around 20%.
The digital revolution is unprecedented and there is no playbook to work out projections with any degree of accuracy. Therefore, their growth and earnings projections can be based on huge optimism. In the last two decades, there have been a few hugely successful winners but a litany of losers who disappeared over time. When the market corrects, even blue chip and established companies’ stock prices appear to be sharp. But when dust settles, we see much more fall in companies riding on optimism with unproven business models or stocks with price multiples much higher than what their growth justifies.
By no means it will be possible for the moment to conclude that the selling pressure is over. Once Covid is seen retreating and supply chain problems and inflation peaks are in sight, the markets should bottom out, and that would be the time to buy some of these businesses.
One can never be sure of when and how long optimism can continue and how soft or hard the correction will be. When it comes to where to invest or not, or to book profit or cut loss, there are certain methods in investing. They may be boring but have stood the test of time. If you are a small investor, avoid risky assets which include crypto, Bitcoins, NFTs, new-age companies with very high risk-reward equations (a few winners are multi-baggers and many losers are zilch makers). If you are a large or high net-worth investor with a risk appetite, you must invest in high-risk assets but only a small part of your portfolio. Asset allocation based on your risk profile and limiting your lure to trending speculative assets is the way to play the game.
(The author is founder and chairman, IIFL Group)
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