Is the market too high? How should you approach things?

Answering the key investor question on today's market levels and why I am not too worried about it

Hi,

Its been a long time since you heard from me via this newsletter. Actually I writing a book about investing in India and that’s kept me busy. Will share more details about the book in the next newsletter. Till then, let’s have a look at the portfolio performance and address the key question I get from a lot of investors - “Isn’t the market too expensive/high? What should we do now?”.

Smallcase Portfolio Performance

The portfolio underperformed the benchmark (“Nifty All Cap Index”) in August - a month characterized by a correction in mid and smallcap stocks. Note that we have ~20% of the portfolio in Gold and it is one the factors that has weighed on the performance but I think its a prudent decision to have some gold/cash at these market levels.

I have added a chart below that shows how the smallcase portfolio has fared v/s benchmark since Jan 2019. The portfolio has generated 34% extra return over benchmark since Jan 2019, but the journey of outperformance has had its ups and downs. Over the long term, we should continue to do well.

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Is the market too expensive? What should you do?

The market has truly had a huge run from the lows of last year in April 2020 - when the US Federal reserve started pumping liquidity into the market and everything is flying since then. Its a natural question for many, what is my thought process on this and what should you do about investments at these market levels?

Why I am not worried about market levels?

With experience, I have stopped worrying about whether the overall market is expensive or cheap. The market looked expensive to me from early this year and if I had acted on it, we would have lost a lot of returns. There are three reasons why I feel comfortable investing at these market levels.

1) Momentum Picks have fixed entry/exit rules - the idea is to ride the wave and get out when the tide turns and stop losses are hit. The system takes care of everything.

2) Value Picks are attractively valued - and I feel comfortable investing in them even at current price levels. If my assessment of value of correct, then it should provide us some safety from large fall in the markets in the long run.

3) Cushion from 20% investment in cash/gold - I have invested 20% of the portfolio in Gold which should help us to invest at lower levels if there is a big market correction.

What should you do?

If you are young and starting to invest, don’t even think about timing the market. What you have saved so far is only a small portion (less than 5%) of what you are going to earn in future. Keep things simple and invest regularly through SIPs. And don’t try to manage the SIPs to time the market, just let a fixed amount be invested at fixed intervals. Try to avoid very large lump-sum investments and look to distribute your investments over time via SIPs.

If you are someone older and closer to retirement, I would urge you to avoid lumpsum investment of large amount and instead ask you to distribute the investment amount through SIP over 18 to 24 months.

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As a parting thought, don’t worry about market levels and stick with the plan of regular SIPs. Also, don’t be worried about low churn in the portfolio - it is by design and as per the plans I have set.

In the coming weeks, you will hear from me about the book and more details about rationale behind some of the stocks in the portfolio.

Also, this newsletter has crossed 100 subscribers mark :) - thanks a lot for your interest. Do share the link of the newsletter with others if you find value.