The Markets Want Your Money. Don't Give It to Them. - Smart Contrarian by Equitymaster
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The Markets Want Your Money. Don't Give It to Them.

Feb 9, 2018

Rahul Shah, Editor, Smart Contrarian

The Indian share markets fell, quite dramatically, and yet nobody is worried.

Already the markets seem headed back up. The BSE Sensex price-to-earnings is still way too high (about 24x). And people are still shouting about 'buying the crash'.

Just take a step back, and you'll realise how we got here.

You only need look at recent mutual fund data to get a feel for the excitement in the air...

New fund offers (NFOs) in the equity mutual fund industry hit a 10-year high of Rs 223 billion in 2017. At about Rs 3.8 billion, the average NFO size is also the highest since the glory days 2007-08.

NFOs are new schemes started by MFs inviting people to invest in them for the first time. And to flourish, NFOs need not just investors, but extremely excited investors.

Just how excited are investors nowadays?

Enough that NFOs' contribution to total MF sales has increased almost four-fold - to a whopping 14.7% in 2017 from just 4.6% in 2016. Interestingly, NFOs had just about gone extinct as recently as 2011-12.

Overall net investment (sales minus redemptions) in MFs has also been breaking new records these days:

And, of course, MFs are having a gala time taking all this money from over-eager investors and funnelling it into equities.

After all, a mutual fund makes money as a proportion of the total amount of money it manages. The more the merrier.

But MFs are not the only market intermediaries doing this.

Companies, initial public offerings (IPOs) markets, investment bankers, brokers - basically anyone and everyone whose interests are aligned to how much investor money they can bring in to equities is doing the same with a newfound vigour.

Like vultures in the brutal African savannah swooping down on an easy meal, intermediaries across the stock market are swooping down on excited investors who are only too willing to hand over their money for a bagful of stocks.

But while everyone else is busy pushing investors to buy stocks, I, at my Microcap Millionaires service, at the risk of looking like a fool, am doing exactly the opposite.

They say buy...I say don't buy

In fact, I've been steadily recommending more sells than buys through 2017, taking subscribers' money quite the other way. To the extent that in our model Microcap Millionaires corpus we're less than 30% in stocks, with the rest in debt instruments.

We've also steadfastly held onto our horses when it comes to fresh buys, and are facing flak for that as well.

And we understand why; it is not easy for an investor to get a 'do nothing' recommendation when everyone else around them is getting drunk on stocks.

But that's exactly what's needed right now.

Just look at the mutual fund chart above and compare it to the stock market's movements. The period between Jan 2013 to April 2014, and the first three months of 2016 were relatively the best periods to put money into stocks.

Sadly, the janta was doing the exact opposite.

And they continue to make the same mistake today.

And we're not letting our Microcap Millionaires subscribers join their folly. Even at the expense of coming across as 'boring' and 'repetitive', I'm going to say once again: Don't load up on too many stocks. Not yet, at least.

Happy Investing,
Rahul Shah
Rahul Shah (Research Analyst)
Editor, Smart Contrarian

PS: If you want excitement, forget stocks, turn to solving this 'cryptic' puzzle. Why are crypto stocks crashing? For answers, read Prasheel. Aka the Cryptowallah's first newsletter, just released this week. Sign up here.

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