Moneycontrol Pro Weekender | Buying slow and selling fast 


Dear Reader,

As equity markets continue to reach new heights, there is no dearth of voices advising caution. The European Securities and Markets Authority, for instance, said, “The materialisation of event-driven risks (such as Gamestop, Archegos, Greensill), as well as the rising prices and volumes traded on cryptoassets, raise questions about increased risk-taking behaviour and possible market exuberance. Hence, concerns about the sustainability of current market valuations remain, and current trends need to show resilience over an extended period of time for a more positive assessment.”

When one sees venerable institutes like Russia’s State Hermitage Museum selling NFTs of Da Vinci and Kandinsky works for cold, hard cash or real-world businesses like D&G securitise and monetise their IP by selling digital apparel for digital avatars, one has to wonder whether this is only the rapidly inflating edge of a bubble or the start of a real, sustainable parallel economy in the ‘Metaverse’ being thought up by the likes of Mark Zuckerberg.

Even “traditional” asset managers, like Invesco, are offering investors the opportunity to venture into territory where VCs and angels fear to tread.

The euphoria is happening against a background of recovery from the pandemic and the lockdowns on the one hand and rising risks to business arising from multiple disruptions on the other. Consider the carnage in Chinese tech stocks as a result of Xi Jinping’s hammer blows, with “big capitalists” and entertainment industry “sissy-boy stars” being castigated in what some believe is an echo of the Maoist era. The latest manifestation of China’s noose around India is seen in its rail link with Myanmar. Then there are the concerns over what the Fed’s tapering of bond purchases would do to bloated financial markets. The risk of a third wave is still out there, with the festival season ahead of us. Our recovery tracker showed mixed trends during the week, with falling unemployment and increasing demand, but the tepid sales of two-wheelers cast some doubt over the rural revival story. What’s more, although the monsoon has improved, the low increase in minimum support prices for the rabi crop, at a time when input costs are rising, could limit farm income and dampen rural demand. Indeed, fertiliser and agrochemical companies are facing multiple headwinds. With state governments cash-strapped, their development spending may get affected.

With pandemics, de-globalisation, negative interest rates, record debt burdens, new age platform businesses, the Internet of things, artificial intelligence, demographic change and rising geopolitical concerns, an age of disruption threatens us. In banks and fintech, the disruption is already evident.

One number looms over all, like the Eye of Sauron over Mordor – 1.5°C. It is widely expected that even with drastic decreases in carbon emission, we will exceed that number and in the event that temperatures rise by 2 or 3 degrees, we may look back wistfully at a time when only markets used to get overheated.

It’s no wonder then that we recommended booking profits on several stocks this week, or waiting for a correction before buying. These include Coforge, up 55 per cent in the last four months, Dhanuka Agritech, Saregama—up 327 per cent year to date, SRF and Nuvoco Vistas. We also advised investors to accumulate the Clean Science and Technology stock on declines. The concern with high valuations also played out in HDFC Life’s acquisition of Exide’s insurance business, which we analysed in detail both from Exide’s and HDFC Life’s point of view.

But is it really time to sell? We looked at arguments on both sides of the debate, but there is a more fundamental issue with decisions to sell stocks. In a recent NBER working paper titled, ‘Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors’, the researchers found that while investors display clear skill in buying, their selling decisions not only fail to beat a no-skill random selling strategy, they consistently underperform it by substantial amounts. The reason, say the researchers, is psychological — portfolio managers think differently about and allocate different amounts of effort towards the two decisions. The paper says: “Extensive interviews suggest that they appear to focus primarily on finding the next great idea to add to their portfolio and view selling largely as a way to raise cash for purchases.” In short, while buy decisions are agonized over and yield superior outcomes over applicable benchmarks or random buying strategies, sell decisions are cognitive step-children and are made using quick, heuristic rule of thumb criteria. But is that really true in raging bull markets, when the mantra seems to be on buying indiscriminately?

Thankfully, there are several stocks that met our stringent buying criteria. These include KEI Industries, SIS, Zensar and a clutch of defence stocks. The boom in the markets is an opportunity for brokerages and asset management companies.

There are other themes: we had a piece on the decade high aluminium prices and whether it was time to buy Hindalco; on Adani Ports benefiting from the recovery in exports; and on what’s next for Ujjivan Small Finance Bank. We made the bullish case for India outperforming the rest of the world. In an interview with us, Carborundum Universal MD N Ananthaseshan said the company has lined up capex for the current year and is open to acquisitions. And we said ITC could learn a thing or two from Zomato to improve its valuations.

Finally, in the context of the Taliban taking over Kabul, armed only with Kalashnikovs and their beards, let’s look at another piece of research. This year’s Ig Nobel Peace Prize was awarded to University of Utah researchers for a study exploring whether beards may serve an evolutionary purpose to protect the jaw during a fistfight. No wonder the Taliban, who love a good scrap, have all that fuzz.

Closer inspection, though, shows this view of beards may be incorrect. After all, none other than Charles Darwin, the father of modern evolutionary biology, wrote in the Descent of Man: “It appears that our male ape-like progenitors acquired their beards as an ornament to charm or excite the opposite sex.”


Manas Chakravarty