Presently, a large part of the market analysis and commentary is focused on the stock rally from the low prices recorded in March 2020. The popular narrative is that investors have made extraordinary return on their equity portfolios, in what was a once-in-a-decade opportunity.
In my view, this narrative suffers from a serious lacuna. This narrative assumes that —
(a) Investment is a discreet process and not a continuous one. Investors make investments only on occurrence of some event and exit as soon as the impact of that event dissipates.
(b) The economic behavior of a majority of investors is rational. They are able to control the emotions of greed and fear very well.
(c) Most of the investors have infinite pool of investible surplus, and they are able to invest material amount of money at their will.
Unfortunately, none of these is even half true.
Investment is a continuous process. Most of the investors stay fully invested in markets at most of the times. Usually, they reduce their exposure to risk assets like equity when down trend is fully established. So in March 2020, investors were raising cash not investing fresh money.
The economic behavior of a majority of investors is not rational. They are materially influenced by the forces of greed and fear. In summer of 2020, fear was the overwhelming sentiment. Expecting investors to increase risk in their portfolio at that time is akin to expecting a patient lying in ICU to worry about the sale in neighborhood grocery store.
An overwhelming majority of investors have a finite pool of investible surplus. A large part of this surplus remains invested at most of the times. The crash in March-April 2020 resulted in erosion in the market value of these investments. For the investors who could stay invested in the fall, the erosion has been mitigated by the subsequent rise in prices. The investors whose risk tolerance was breached by the fall would have exited their positions and therefore there losses would have become permanent in nature. Very few investors would have made material incremental investments close to the market bottom last year. Only these investors have some reason to celebrate. For most others, it is business as usual.
Statistically, if we eliminate the fall in March and April of 2020 and subsequent V-shaped recovery and assume a market in ad continuum, Nifty is up about 26% from the pre-Covid high recorded in January 2020. The past two years (June 2019 to June 2021) have yielded a near-normal return of ~13.5% CAGR.
Small cap (55%) and Midcap (52%) have given better return than Nifty (26%) since pre-Covid high of January 2020. However, if we consider the return of mid and smallcap for past two years, there is hardly much to distinguish.
Most notably, PSU Banks and Media sectors are yet to reach their pre-Covid highs. Banks, realty, FMCG and services are all underperforming Nifty if we consider data from pre-Covid (January 2020) period. Metals, IT and pharma are the only sector that have outperformed Nifty meaningfully in past 16 months. These sector put together account for less than 30% weight in Nifty.
The point I am trying to raise is that the investors must cut the noise out and focus on their investment strategy, which must be in full consonance with their aptitude and risk appetite. Listening to the popular narrative and getting overwhelmed with the feeling of missing out (FOMO) will only lead them to make mistakes that may cost dearly.