Action vs inaction

You may have assumed our cover story of 'Wealth Insight' August 2023 issue is about stocks and markets, but it's not. Instead, it is about investor psychology. The markets look hot and have looked hot for a while now. But are they actually hot? Only time can tell. I remember a day in 2006 when the BSE Sensex first hit 10,000 points. Going from a four-digit Sensex to a five-digit one felt like a historic moment. Psychologically, in terms of what investors felt about the future prospects of their investments, it was a very big deal.

The only historical parallel was the day in July 1990 when the Sensex first crossed 1,000 points. However, that was a different India and a different stock market altogether. In any case, reaching four digits is too entangled in the painful memories of the Harshad Mehta scam. There will be a day in a few years when the Sensex will reach 1,00,000 points.

These are major milestones, but every all-time high is not. In a market generally heading upward, an all-time high is a fairly routine matter and should be taken as such. As I'd calculated for a recent column that I wrote, almost 6 per cent of all days in the history of the BSE Sensex have been all-time highs. Six per cent of all days is the arithmetic equivalent of 22 days a year—not a rare event by any stretch of the imagination.

What makes it a serious issue is investors' reaction to it. Depending on their perspective, some investors will feel that now that the market has reached so high, it will surely pause and may crash too. Others will feel that the market is moving and will keep moving for a long while. As our cover story points it in a quote from the renowned investment manager and author (an unusual combination!) Howard Marks, "...the essential inputs aren't economic data or financial statement analysis. The key lies in understanding prevailing investor psychology."

However, the conclusion we draw from this is not that we must try to figure out the psychology of the rest of the market or we won't be able to create wealth for ourselves. That would be a waste of time. Instead, we'd like to sidestep the issue of what other people are thinking and, as investors and analysts, focus only on our own psychology. In other words, are we, rationally and calmly, going to consider the market value and the intrinsic value of the stocks we are investing in? Or are we going to be obsessed with what other people are thinking about the same stocks?

Certainly, all the inputs from social media and the legacy media are now quite breathless about the market highs. The general refrain is that everything will go up, and you'd better buy while stocks last. The train will leave the platform any time now. A minority of views hold that everything has gone up too much, and you'd better sell while the prices are still high. The train will leave the platform any time now. The general feeling is that things are happening, so we must do something.

In my way of thinking, these two views are not the opposite but the same. They both ultimately argue for continuous action in response to external conditions. This concept of continuous action is misguided. When I think of the actual activity that should take up most of the time of investors, then it should be nothing. For most— almost all—of the lifetime of an investment, you should be doing nothing about it, regardless of the market conditions. The bulk of the activity of investing is waiting.

The bottom line is that you should take the opportunity to fix obvious problems, but on the whole, this is not a time to act just because the numbers are ticking up.

Suggested read: Market highs are dangerously alluring