Respecting valuation is a fundamental behavioural trait in every good investor. Losing sight of valuation discipline in a soaring, frothy market can make an investor leave the zone of safety in his portfolio.
Crossing the line of valuation discipline in investing is like crossing the Lakshman rekha. Once you cross the line, you tend to lose sight of it. As the hype rises in the market, you start Coattailing the trend and eventually find yourself like the zebra in lion country.
The current market trend clearly demonstrates strong tendencies among investors to just buy without bother, ride the wave, soak in the euphoria and simply watch the crazy, selective bidding up of valuations.
This certainly isn’t new. It has happened in every cycle. But, the overconfidence in its sustainability and the lack of fear among institutional investors is happening at a scale that is unprecedented.
So, investors chasing expensive themes aren’t being told there are serious downside risks where they are actively investing. And, there is a make-believe feeling created that every correction is a buy Opportunity in already expensive stocks.
This belief runs contrary to sound valuation judgements and is fueled by excessive recency bias.
The only good news is that the strongly divided market is throwing away value stocks to buy these expensive stocks. This is creating a great buying opportunity for disciplined value investors.
