In bull markets, FOMO (Fear of Missing Out) makes us do foolish things. But right now, it is time to be more wary of FOMO’s close cousin who visits us in bull markets, the fear of selling out or FOSO. This is the tendency to postpone selling equities because you’re afraid of looking foolish and losing out upside.
Pricey markets
Today, big-picture indicators are clearly signalling a pricey stock market.
The Nifty50 is trading above long-term averages in terms of price earnings (23 times) and on a price-to-book value basis (over 4 times). The broader market is looking even more expensive than the bellwether indices suggest. The Nifty500 index at a PE of 27 times and P/BV of 4.4 times.
High valuation is not just confined to index stocks (which are actually cheaper than the rest of the market) but is pervasive across mid-cap, small-cap, micro-cap and SME names. A quick screener on 2,300 listed stocks shows over 700 stocks trading at a PE of 50 times or more and 220 stocks trading at a PE of 100 times or more. The expectations embedded in these valuations are clearly going to be a tall ask for companies from today’s high base.
After growing at a scorching pace between FY20 and FY24 on the rebound from Covid, both the Indian economy and its companies are expected to see a slowdown in growth momentum this fiscal. Most economists expect India’s GDP to grow by 6.5-7 per cent this year after the 8.2 per cent growth in FY24. In Q1 FY25, Nifty50 companies reported a net profit growth of just about 4 per cent after sustaining double-digit growth for the last four years.
Reasons to sell
While broad market valuations shouldn’t be the trigger for you to cash out of all the equities you own, you should sell some of your holdings if they fit the following description.
The financial goals for which you invested are coming up in the next 3-4 years. Experience suggests that when bear markets arrive in India, it takes 3-4 years for the indices to recapture their previous peaks and deliver returns from there. Hanging on to equities for proximate goals can leave you short of the capital you need it.
The fundamental thesis you had for a company has played out and valuation has soared beyond what you expected.
The company is facing regulatory, competitive or external challenges which invalidate your initial buy thesis.
Your allocation to equities as an or to a sub-segment like small-caps or micro-caps has shot past your pre-decided allocation.
You found a better investing opportunity in a more attractive asset or business.
Looking foolish
Yes, in the last six months or so, anyone who has sold stocks has looked quite foolish to have bitten the bullet. If you sold jewellery or IT stocks a few months ago because they seemed highly valued, they’ve gone on to deliver another 20 or 30 per cent gain. If you moved to higher cash in your portfolio to hedge against risks from the Lok Sabha election or Union Budget, that has back-fired. Markets have brushed off an adverse election outcome and capital gains tax hikes as if these events hardly mattered. Seasoned investors sounding warnings on froth in SME IPOs or green energy stocks are being heckled by newcomers, as these super-heated themes continue to sizzle.
However, to be a successful wealth creator in the long run, you absolutely need to take actions that make you look foolish in the short run. Legendary investors from Warren Buffett to Michael Burry (of the Big Short fame) have been heckled by investors for lacking vision when they bet against popular market themes in the hey-days of 1999 and 2007.
At the peak of the dotcom bubble in 1999, Buffett rated his own performance a “D” after Berkshire’s stock price dropped in a soaring market. He wrote in his annual letter: “We don’t own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem — which we can’t solve by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive advantage. But our lack of tech insights doesn’t distress us.”
There are plenty of examples in India, too, of successful fund managers cashing out early from popular themes or completely avoiding them to win in the long run. Erstwhile HDFC Mutual Fund CIO Prashant Jain delivered an over 20 per cent CAGR (compounded annual growth rate) on HDFC Flexicap Fund over a 20-year period from 2003 to 2023, mainly by giving over-valued sectors a wide berth at market peaks (which were evident to others only in hindsight). He braved brickbats from fund investors and market commentators when he owned zero real estate or power stocks in 2007, stayed away from NBFCs in 2017 and loaded up on PSU banks when they were in the doghouse.
Reducing regret
Should the markets rally on for some more time, you can reduce regret about selling too early, by taking a few steps. Do not take all-or-nothing calls where you cash out of all your equities in a frenzy. Sell only enough to restore the asset allocation in your portfolio to pre-decided levels. When choosing your sell candidates, go by valuations and not absolute price gains. If you dream of owning multi-bagger stocks, you need to allow 5X stocks to turn 10X and even 100X, as long as fundamentals and earnings are supportive. Finally, peer pressure can be a big deterrent to rationality in this market. Refrain from sharing your sell decisions on social media or with acquaintances, as that will only add to FOSO.
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