In this edition of Contramoney, let me state the obvious, re-label the “smart money”, and then, perhaps, challenge the dumb money’s intellect (you and me are in this bucket).

Now, let’s start with the obvious.

Foreign investors have been selling Indian stocks like there is no tomorrow. This is not a recent trend; it goes back many months.

Now, why are they selling?

To begin with, it was said to be the pricey valuations of Indian stocks.

Then came the rationale of money moving back to the US as interest rates headed lower, making stocks more attractive there.

And the latest now is that the recent “turnaround” in sentiment towards China is pulling away some money from India.

All these points are very valid. That’s if you are a punter looking to flip opportunities as fast as they come. None of these, hilariously, is in sync with all the peans such punters sing about the long-term attractiveness of India.

The other side of this punt is the Indian mutual fund. They could otherwise collectively be called the India perma-bull fund. Why?

Well, no matter what, they keep buying stocks in a market that gets pricier by the day. Why? They have sold the India story so well, that they cannot stop the flow of money into their funds. And now since the money is pouring in, they need to keep investing it.

FIIs are exiting India for non-fundamental reasons. Mutual funds are buying India for non-fundamental reasons.

And we treat them as smart money and track their every move as if it were a path paved with gold.

Stock market sell-off: The most important question to ask yourself today

I suggest in the present situation, the FII and mutual fund money is actually the dumb money. And with few exceptions, very few, their moves should be largely ignored.

Do you agree? Now, this is tough to do because rear-view returns are really good. In fact, and I speculate here, since the markets have almost unidirectionally gone up, the payoff has been the best for those taking on more risk. The greater the risk, the greater the return—and the fatter your profits. My view is up against cold, hard cash returns. And we both know how this argument ends.

But I hope you will take a moment and play out the “inverse” scenario in your head. In a falling market, the greater the risk, the greater the…?

Given this background, I encourage you to think about a few things as you go ahead and plan your asset allocation, and investments.

First, remember that the story of India is rock solid. But at the end of the day, you are buying into a company. So, above all, pick your company i.e. stocks extremely carefully.

Second, when you do decide on investing in a company, buy with a large margin of safety. And in case, such an opportunity does not exist, don’t hesitate to sit on cash. You will be surprised that cash earns an attractive yield these days.

Also Read: Warren Buffett’s cash pile soars. What it could mean for you.

Third, plan on being a long-term investor. A very long-term investor. In the near term, the market will move for technical reasons (perhaps, like now), but in the long term, fundamental reasons will determine the fate of your investment. It’s in this long-term phase that India’s growth tailwind will matter a lot.

What if you are an investor in a mutual fund?

I guess the best thing to do is immediately shoot off an email to your fund manager asking, “Are you buying into the market because there are very attractive opportunities available or because you are pulling in a lot of new money that needs to be deployed?”

Think about it. If you are doing an SIP at this level, what is the return you expect from here onwards? 20% CAGR?

I mean, it’s possible. Anything is possible. But what is likely to happen?

Recently, I read a quarterly note from a very respected fund manager who went on to set up a PMS. This is what he had to say: 

“Markets therefore offer compounding prospects in line with earnings growth and should deliver around 12% CAGR over the long term.”

Now, 12% pa is not bad. But when you compare it to some fixed deposits that offer around 9% pa, you should ask yourself: Should I mindlessly keep doing SIPs? Or should I stop raiding my safe money bucket and be happy with the 9%?

Sticking to your asset allocation now is more important than ever. Being a perma stock market bull has worked out well, in hindsight. In the future, over the long term, what will matter more is whether you allocate well enough to meet your needs. The goal here is always going to be optimising your allocation to your personality and your needs, and not mindlessly aiming to maximise returns at any cost.

Also Read: A broad gameplan for the right asset allocation for you

If you are already on this path, then you are the smart money. And perhaps that’s a good enough reason to stock following the dumb money till rationality returns.

Happy investing!

Rahul Goel is a finance and publishing professional with over 25 years of experience in the industry. You can tweet him @rahulgoel477.

You should always consult your personal investment advisor/wealth manager before making any decisions.



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