'For me to win, everyone else must lose'. That's the way the game of musical chairs is played. There's only one winner. So, everyone must stay in the game as long as possible, even though they know that losing is overwhelmingly likely to be the outcome.
However, equity investing is not like that, unless you choose to make it so. How? A wise person once said that there's nothing more irritating than watching your neighbours get rich. In that sentence, replace 'neighbours' with 'other investors' and you will identify the main problem that so many equity investors have right now. They fear that the markets are overheated and ripe for a fall. They feel it in their bones that they should sell and cash out. If they truly feel that, they should just sell out and redeem all their investments. And yet they don't want their money to be just sitting in the bank, while other people are getting rich. Note that I'm not saying, even for a moment, whether they are right or wrong about a crash being imminent.
This is not personal animosity with actual investors that you know but just the fear of losing out. During the past four weeks, as the Sensex's ever-new heights have gained attention, investors seem close to panic. There are many kinds of panic in the world of investments. There is of course the selling panic that sets in when markets start crashing. Some people are also familiar with a 'buying panic' that sets in when the market is going up rapidly. However, what these people are experiencing now is a third kind of panic that is best described as a 'holding panic'. They are holding on to their investments but are in a panic about what may happen next.
In the last two or three weeks, I've been asked by several people who are in this situation and want to know what to do. Some simply find themselves in a much better position than they expected to back in March or so. Others have more serious concerns, for example, an impending retirement.
The push and pull are equally genuine. However, this is not a new situation. In the last 20 years, we have had a number of such phases. At its peak, each gave rise to a similar holding panic. However, savers should remember that each time, the ultimate lesson was not that you need to find the perfect time to cut and run. From the inside, in each bull run, it appears that the problem to be solved is one of timing - when is the perfect time to sell so that you can capture all the returns that are on offer? The sense of immediacy also makes one feel that the exit bell could ring any day. However, it could last for a long time. I still remember there were many, many investors who were already in this mindset back in 2004 and yet it went on for almost four more years. A bull market can be a low-burn mode for years and years.
Timing is assuredly not the problem that needs to be solved here. The solution is not to exit at the right point. Instead, the solution is that when the market turns irrational, you should be holding the correct mix of assets and only the highest-quality stocks.
Of course, you will lose money when it turns. However, if you have a rational asset allocation and have been maintaining it, you would take plenty of gains into fixed assets. On top of that if you are holding carefully chosen stocks that have been bought at a good value mix, you are set to do well out of the eventual turnaround.
This is not some hypothetical fantasy I'm weaving but exactly how smart investors came out of every boom and bust and boom cycle in recent decades. This a piece of history that repeats itself like the drumbeat in a piece of music. It's not easy to dance along but worth every bit of the effort.