Skip to Navigation Skip to Main Content Contact us
Skip to Navigation Skip to Main Content Contact us
  • FIIs buying: Don't be unduly excited about markets

    March 14, 2014

       read ( words)

    The equity markets have been flat for over five years and now we see some movement. The long wait seems to be behind us, as investors are rushing back to stock markets. Fear of poverty has given way to hope for riches. Nothing has really changed in the last two months on the economic front or at the corporate level. On the contrary with elections round the corner uncertainty has increased and stock markets hate uncertainty. But still the stock markets are reaching new highs. Data shows that the FIIs have been buying. On this logic investors are rushing to the markets. The sentiment has changed. Investors have become bullish on the hope of BJP forming a government which would add stability and a refreshing change from coalition politics.

    With stock prices inching forward it is impulsive for investors to become greedy and enter the stock markets. Herd mentality is at work. When we have this sort of a situation you require stories that will be manufactured and sold to the investors. One such story that will emerge will be the Gujarat story. Hopes of BJP coming with a majority and Mr. Narendra Modi becoming the PM would be the basis of the Gujarat story. Stocks of industrialists close to the Gujarat government and the PM designate would attract attention. Companies based in Gujarat will be in demand. All sorts of new theories will emerge. Not that I subscribe to this way of investing, but this is how the investors, the traders and punters will behave. This is the result of the behavioural trait of representative bias. Stocks of companies close to the BJP and stocks in Gujarat are representative of future successful outcomes. All the available information on them is positive and investors are guided by the recency effect. Actually it has already started happening and such stocks have become fancies of the market. A word of caution: When you chase a fancy, you pay a fancy price and when the fancy ends, you end up with a fancy loss. Investors need to resist this temptation of making investments based on current fads and stories.

    Investors also need not get unduly excited about the markets just because the FIIs are buying. Everyday newspaper reports talk about FII purchases and this availability bias will distort your thinking. Assuming them to be more learned and intelligent with more knowledge about the markets is a mistake. They are also human beings like you and me and are subjected to the same type of behavioural traits emerging from greed and fear. Think of the behavioural trait of herd mentality , they all come together to buy and when the party ends they will all come to sell at the same time. Representativeness also makes them chase the fancies of the markets. Avoid the temptation of getting carried away by their actions and keep your emotions under control.

    Contrarian thinking at this stage will open your eyes to a host of opportunities. Its only during such times that real good stocks get neglected and are available at attractive valuations. During the tech boom in 1999/2000 good FMCG stocks like Nestle, Gillette, P&G, Hindustan Lever etc were available at attractive valuations. If you would have had the courage to buy them and hold them till date, you would be laughing your way to the bank. But you got to be a long term investor to reap the benefits of these kinds of opportunities. In crazy times when fads and fancies rule the investor herd, opportunities emerge elsewhere. A wise and a long term investor will look at such opportunities.

    Now no one knows the outcome of the elections or how the markets will behave. However if you enter the markets as a trader or a speculator you are taking a big risk with your finances. But if you are looking at investing for the long run even such markets can offer tremendous opportunities in "out of fancy" stocks and sectors. Be patient and do not be carried away by the noise in the markets.

    Remember one important behavioural trait of investors: They only talk about their successes and never of failures. So tomorrow if you hear that everyone around you is making money and you find that you are not so lucky, don't be disheartened: don't trust what you hear, its not the truth.

    "Investors find a stock less risky if everyone is buying and the stock prices are going up. They find it more risky when no one is buying and the stock prices are going down". Just go against the herd and you will be a successful investor.

    The original article could be seen here.
    comments powered by Disqus

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
    © PPFAS Asset Management Private Limited. All rights reserved.
    Sponsor: Parag Parikh Financial Advisory Services Limited. [CIN: U67190MH1992PLC068970], Trustee: PPFAS Trustee Company Private Limited. [CIN: U65100MH2011PTC221203], Investment Manager (AMC): PPFAS Asset Management Private Limited. [CIN: U65100MH2011PTC220623]