In the 1980s we were brought up with the theory that the job of the markets is a) price discovery and b) resource allocation to the right companies. In the 1990s when we became members of the stock exchanges, we were sure that we were adding value to the customer by doing stock picking. Sebi said ‘brokers’ should not do research, but just buy and sell. I still that is funny, but I am too damn junior to tell the all knowing regulator anything different.

Wall street and Dalal street always made fun of the ‘retail’ investor for having no stock picking ability. ‘We’ were the experts. We knew what to buy and what to sell. Then came the INDEX aka Sensex and then Nifty. Followed by Index based investing. Sure we needed an index but indexing sounded odd. Here the professional was admitting that he did not know what to buy, so he was buying the whole market. Sounded funny, but it worked. The amount of index funds in the USA is mind boggling. A full market index means it covers the whole market – say all the 9000 shares listed in the markets.

New products like etf, index funds, were all admitting that professionals did not know what to buy – AND we were all saying that it was the best thing to do. We were now celebrating what we were laughing at πŸ™‚

So what to do? As usual I had to look at US. The scenario is scary there too. The US market which is likely to grow at 2% p.a. is now at a p/e of 29. This is not very far away from the 1929 crash trigger. Are these prices sustainable?

Now 84% of the funds coming in are on auto pilot mode. ETF, Index funds, Robo advisory – all are growing at a fantastic pace. Will they just keep buying or will they start reallocating to other asset classes as the pe gets to higher levels?

Investors today do not want to invest in direct stocks – they prefer outsourcing it to the ‘professionals’ . Who are saying we cannot create alpha so please go to the index. Great. Today, investors buy and hold (or at least that is how the industry hopes it will happen) regardless of whether entire markets are undervalued or overpriced. I would be wondering what happened to my wealth if say the market fell 28% over a 18 month period. Will these people remain there or run? Will Robo advisory forecast this? Highly unlikely. Nor am I sure how a hug and a kiss from the IFA help if your portfolio is bleeding.

The view of investing that has prevailed for decades β€” how well you succeed at it is determined by how smart you were, how many balance sheets you saw and how hard you work at it β€” is gone. Or is it just a passing phase? This is now replaced by a model in which you hope to succeed by buying, buying, and buying more.

There are no easy roads to riches in the markets or anywhere else. So it’s tempting to conclude that when we make investing effortless β€” and have we make it more dangerous too?

My great grand parents had paddy fields. They grew rice, de husked it and then consumed it. My grand parents and even my parents got the rice from the fields or the shop – more shop than field. My wife gets the idli dough from the shop. My daughter is most likely to buy idlis from amazon.com.

Take investing. We searched for balance sheets – the local ‘raddiwala’ became a friend. Then Google came. Tons of raw data was available. CMIE and Bloomberg gave data in a far better organised way. However if 84% of the money coming into the market comes in mindlessly, I am worried about the volatility a panic could create.

Those investors who can meditate through a crisis will come out stronger, but not all of them are Gautam Buddha. Again look at the US, the mutual fund lobby convinced the govt to put all the pension money in 401(k) into the mutual fund. Government obliged. The US market moved from 10% in indices to 84% Index funds without creating a mad upturn (as of 9 March), US is insanely over priced.

 

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  1. The US indices contain Technology giants like Apple,Amazon, Netflix , Google, Facebook, Microsoft, etc. These have global markets and can run at even higher margins outside USA sometimes.
    The thinking goes that these companies have global markets and not just restricted to USA. The GDP to market cap ratio that Buffett talks about and the business models where Amazon could potentially be no 1 retailer countries like India or where Apple captures 110% of profits in the cellphone business (others make a loss). This could potentially make even 25-30 PE seem reasonable in the long term.
    http://brooklyninvestor.blogspot.in/2017/03/buffett-on-valuation.html

  2. Lot of American Indians still believe in USA and capital markets even after 2008 crash still somebody is hyping about USA markets even God cant help!

  3. SIP when done at a massive scale leads to a situation where AMC just keep inflating the stocks because they have surplus cash and need to invest ignoring market saturation or P/E ratios etc. Mark Cuban in one interview says diversification is for idiots. Although i dont believe in it completely i do see the advantage one has when opportunity and capital in hand coincide.
    Would love to hear your take on PSU banks bad loans and govt infusing 10K cr in PSU bank to balance the bad loan. Too big to fail banks, what happens when they cant recuperate the losses?

  4. there is no scientific influence in investing either in equities or property or gold! actually anyone ever used brain?
    duryodhana believed bigger army wont fail!
    Americans believed bigger banks wont fail!
    when Americans infused”monies” into big bank losses after 2008! we are infusing now!
    99% of this world lives for sake of 1% unscrupulous unethical over ambitious rich people!
    we are like suyodhana we believe “rich wont fail”
    million times “krishna ” proves! still…
    life and markets same -mindless!

  5. What SIP? It’s only a new way to make losses to public! After 30 years one American economist gets nobel prize for discovering that SIP made losses! We have to give American economists Nobel prize man! Thats why we are living! We are just Indians man!

  6. When the markets are low, everyone says “BUY” so when the market eventually goes up then they boost they are right. When the markets are high, everyone says “SELL” so when the market eventually goes down then they boost again they are right. It’s the people who read, listen, follow advises remain as fools while those who write, speak cover themselves as experts. Surprisingly, these experts neither have capability to predict the events nor they have courage to admit that they know nothing. It’s easy to say that the markets are “high” but it is difficult to predict what high is maximum. 99.99% talk (in any form) that happens about stock markets is just attention grabbing. It’s useless because the ‘experts’ who talk about it are clueless! What I really don’t understand about these so called ‘experts’ is that WHY they get excited about hardly a 10% increase in markets and then WHY they cry for just 10% crash again? If all these experts and investors ever wanted to achieve is this 10% then wouldn’t a chit fund or NCD or fixed deposit is better off?

  7. This scares me. I am 29 and am putting in about 20% of my salary into some mutual funds. Mindlessly as you said…because I trust the mutual fund manager to take decisions in my best interest because that’s his full time job…what should I do as a layman to ensure that I retire peacefully? I would rather spend time increase my income and domain knowledge than pour through pe and balance sheets!

  8. nothing scary! about life or markets! if “KRISHNA” kicks you ,you join 1% elite group,otherwise you join us the world 99% of us, un-marriageable wives, un-manageable children,un-workable jobs! and un-returning investments! nothing scary! at the end you will become “rich” like us in “KKKKNOWLEDGE” KKK”
    surendra

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