Expect Surprises

Liquidity can create more irrationality  than we can imagine. Often, investors hasten their investment process just to rid themselves of liquidity. It tends to unnerve investors who are sitting on cash and  seeing a rising market. It pains them no end to be mere spectators and not an active participants. Participation anxiety grows when liquidity is high, returns are low in alternate investments, and the markets are rising. The past few weeks have seen heightened participation anxiety. Participation anxiety has two dimensions. One is to desperately buy equity and not be left out. The second dimension is to avoid stocks which aren’t moving and to focus only on the rising stocks. This triggers a peculiar trend. Rising stocks rise further. Falling stocks dip more. Slowly, people forget to interpret the business fundamentals of rising stocks and stop connecting them to valuations. Instead, all decisions are made on the basis of price moves. The past few weeks have seen this trend heighten. More importantly, the falling stocks are being ignored.  This is creating a classic value paradox, the likes of which we have seen in earlier bull runs of 2000 and 2008. Conventional investment thinking will see opportunity where others don’t. But, for now, price and performance seem to be the twin stars of our markets.

“Wealth can get destroyed by an accidental event. But, remember that wealth creation is no accident.”

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