Read the signals
Companies are raising capital at a pace like never before. Promoters are selling their shares at a frenzied pace. Mostly, the buyers are domestic mutual funds. The target segment is restricted to midcaps and small caps.
Clearly, retail inflows are placing strong compulsions on fund managers to deploy money quickly, as holding cash is outside their mandate. This has created two conflicting trends, both connected down the middle. Firstly, private holders of large positions feel that inflows will become even stronger leading to significantly higher valuations. So, they feel that their own selling can wait. Secondly, promoters of overvalued, quality companies feel that this is the best time to use the supply scarcity to create liquidity for themselves.
These two are contradictory trends. But each stance carries a built-in calculation. The prerogative is to make the best out of the larger institution’s compulsion to deploy money. But, this clearly qualifies as a serious risk to public capital.
The onus of protecting public capital clearly falls on the investors or advisors. The current stream of placements is a counter-intuitive warning.
“Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity.”– Howard Marks