This morning a client of mine phoned me and complained regarding his portfolio doing poorly when the markets are at an all time high. He doubted the choice of his stocks and this doubt increases when someone else is managing your portfolio. I am sure most of you must be suffering from the same anxiety.
Now when you say the markets are up what is the yard stick you use? Off course it is the BSE Sensex or the Nifty. When these indices go up it is widely reported by newspapers, TV channels etc. that the markets are up.
Lets go into the composition of the Index. BSE Sensex comprises of 30 companies and the Nifty comprises of 50 companies. How do they choose the companies that get in to the indices? They use quantitative techniques rather than qualitative. Market capitalization, turnover, volumes and the size rather than the qualitative factors like business model, profits, sustainability etc. Now when such stocks go up due to speculative activity, or funds buying index stocks the same is reflected in the index going up. Everyone rejoices and cheers the markets. If you have been a wise value investor choosing stocks on their true merit and sustainability you would be dumbfounded. These stocks are not going up even though the market is up.
The problem lies in us choosing the wrong anchor. Our sample size and the way we choose that sample is extremely faulty. There are over 6000 stocks listed on the markets and we just take a sample of 30 to 50 stocks to judge the markets? We are suffering from sample size neglect and it would be wrong to base our decisions based on index movements. They only confuse us.
It must be borne in mind that stocks go up or down for any reason or for no reason at all. So if your stock selection is good you need not be much bothered about how the stocks are volatile in the short run. That is the reason the reason that it is only long term investment strategy that will give you handsome returns.
In such volatile times when the indices are pushed forward value investors will under perform the markets but they will need the courage and the conviction to believe in the value investment strategy.
Another psychological trap investors fall in to is comparing the equity returns with the prevailing yields on fixed income securities. Yes no doubt the equity markets have not performed well in the last 5 years and fixed income seems attractive, but that is no reason to switch from equities to fixed income. Cycles go on and on, keep faith in your investment strategy.
