Nifty at 20,000 it must be fundamentals over FOMO

Good God, Nifty is almost 20,000!

For traders, and especially investors, there is a question playing in their minds. Is 20,000 Nifty time to get out of the markets? After all, in the past, whenever the markets rallied very sharply, it ended with blood on the street. To answer that question, you must first ask why you want to hold on. Remember, holding on to a stock or any investment is never about whether the index is high or low. 

It is about how the stock fits into your long-term plan, what are the prospects of the story and finally whether you have a better plan to use the liquidity. Remember, the Sensex has given 17.4% returns over the last 44 years through tumultuous occasions like wars, droughts, terrorist attacks, natural disasters, and trade wars. Unfortunately, investors tend to get caught up in a different kind of debate altogether these days.

It boils down to fundamentals versus FOMO

Nowadays, the decision to invest or sell out when the market is at a new high is driven by just two factors. There are fundamentals, which may be strong and induce the investor to hold on. The argument is that India is still a great story, consumer demand is still robust and the Indian GDP is likely to go from $3.5 trillion to $5 trillion in 7 years. Obviously, the India story cannot go wrong in such times. That is what fundamentals are all about. It may or may not work in reality, but we will leave out that argument for now. 

The second factor is more dangerous and can actually backfire. It is called FOMO. Now if you are a millennial or if you have children who are digital millennials, you would be familiar with FOMO, or the fear of missing out. For most investors, market highs are the time to make hay while the sun is shining. It is very difficult to sit tight and watch the market when your neighbour is making obscene profits by picking low-hanging fruits. That is a fairly dangerous approach and a bad reason to buy or not to buy stocks. 

Can you price stock like works of art?

At the peak of the digital boom,  most of the Indian digital plays had moved from being unicorns to decacorns in no time. Sceptics protested that the PE funds and VCs were pricing start-ups like works of art, where it is OK to pay a price that is totally divorced from the fundamentals. Quite often, in such markets, it is the Greater Fool theory that is put into action. It assumes that you can pay any price for an asset, as long as you are confident that a greater fool will buy it at a higher price.

Now, that sounds like a morbid assumption but it is a reality. However, we get back to the basic question of whether it is time to sell. Obviously, this decision has to be driven by fundamentals and not by FOMO. In fact, here is what the investors must look at before taking such a call on whether to hold on or buy or sell out when Nifty and Sensex are at peak levels. Let us look at some key decision points.

• Do you really need the cash?

If you are sitting on a very neat profit on the stock and you have been holding it for a long time, it looks like a good idea to sell and cash in the profits. But say, a stock like Kotak Bank converted an investment of Rs10,000 into Rs350 crore over 38 years. How do you really decide it is time to exit such a stock? One question to ask is whether you really need the cash at this point in time. 

Yes, liquidity is one part of the story but that is not only what the need for cash is all about. Obviously, you don’t want to sell a multi-bagger and use the money for your creature's needs. That is bad financial planning. You want to invest in another asset that can multiply in value over time. If you don’t see such opportunities, rather stick to your holdings rather than trying to sell out and then wonder what to do with the cash.

• Financial plan fit and portfolio rebalancing

This is the second strong reason for you to exit a stock at high levels in the market. For instance, if you are overexposed to banks and your allocation is 20% more than the Nifty allocation, it is time to adopt course correction. In such cases, selling out of a bank (even fundamentally sound ones) has a logic to it. The other issue whether it is essential to sell the stock as part of your routine portfolio rebalancing. 

You rebalance your portfolio for various reasons. Stocks could have rallied too sharply or some of the stocks may have been too good to be true or in some cases, your goals may have changed. In such cases, it is best to allow the stock to leave your portfolio based on the valuation assumptions. Here again, the consideration cannot be FOMO, but purely based on your own financial plan.

• What if you are confused with the market?

The funny part about the markets is that investors tend to be ambivalent when they need to take a stance. Here again there is a simple rule to follow. For instance, if you plan to exit after making a good profit, you have a choice between further maximizing profits and minimizing current regret. The former option is uncertain, while the latter is certain. Just use the opportunity to sell out of the stock and ensure that you can minimize your regret. It is OK to celebrate with some profits rather than regret at leisure.

Before you sell a stock be very clear on 2 things. Firstly, how are you going to put the money to investment use and secondly, how much would you lose by way of taxes. Once you have an answer to both these question, the decision becomes easy. The moral of the story is to let your decision be driven by your goals first and then  by fundamentals. Don’t let FOMO come in between!