Overpaying comes at a heavy price. Stocks that helped the Nifty touch its all-time highs could also end up being the worst performers just a year later. After hitting a high of 26,277 on September 27th 2024, the Nifty fell by 6.17% to 24,655 a year later.
However, the steep decline in the IT pack from its September 2024 levels brings back a simple investment lesson to the forefront: Never overpay, even for quality, on the pretext of being defensive. The fall in TCS (33%), Infosys (24%), HCL Tech (23%), and WIPRO (14%) brutalised portfolios across mutual fund categories. Ask anyone why they kept holding on to these stocks even when the valuations were stretched just a year ago, and you will get the usual excuse. “But I was only being defensive.”
The point that is completely missed is that buying at the right valuations is the only defence. When valuations get stretched, that defensive stance must translate into position downsizing and risk mitigation. When risks spike too much, the investment stance itself must be revisited.
Not many who blindly bought IT a year ago are convinced about its prospects right now. The lack of visibility and guidance has rattled investors so much that they no longer see the sector as defensive.
Investors would do well to remember a simple principle: valuations will always be the driver and the defence. When you choose to treat it as a driver and when you choose to treat it as a defence makes all the difference.