The rising froth in the PSU space only showcases the extremities of investment behaviour. We are prone to swing to the other extreme when we remain too long at one extreme. This is exactly what we see in the PSU trade.
Cut to 2001. We were just recovering from the tech crash. Valuations of PSUs had collapsed even more than the broader market. They had literally reached lows that defied all logic and looked like textbook opportunities for the Grahamian school of value investing. Value investors lapped up PSUs. Within just 30 months, PSUs were the darlings of the market. Most PSUs were trading at their peak valuations. And, market was valuing PSUs with very little room for any error. Then, the 2004 elections happened and we saw a regime change.
Reforms stalled for a full term and investors who held PSUs were left high and dry. After nearly eight years of NDA2 rule, we saw another 2001 moment in 2021. And, 2024 pretty much resembles 2004. What we learn from history is that investors never learn enough from it. They choose extreme positions on either side and then swing from one extreme to another exactly when they must certainly not do so.
When you price equity assets to perfection, the smallest imperfection is enough to upset your calculations. A smart seller should know when is the right time to leave a trade that looks too good to be true. Value investors who are usually more grounded than smart, usually excel in making this shift. It may be very close to that time when they must leave the PSU trade. Time will tell how many value investors are for real.
