We have found the enemy and he is us

The chart below shows the time the NIFTY has spent in its historical trading bands of between 10-29 trailing earnings.  As can be seen from the chart below, the NIFTY has spent only about 16% of the time in a market that can be labeled “cheap” vs 44% of the time when it was “expensive” (trading well above its historical average).Now examine the behavior of the average Retail investor (as a proxy, we use Net inflows into Equity Mutual Funds).  77% of Cumulative Net Inflow into Equity MFs was during the period when the market was either expensive or very expensive; not surprising, very poor returns were earned.

The same attitude can be extrapolated to individual stocks.  Investors are reluctant to add to quality franchises when they are available cheap because temporary distress in earnings is often extrapolated to structural weakness in the business model.  TV pundits, driven by technical trends, amplify the uncertainty and fear.   The protective instincts of the brain over power the rational instincts. 

“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological” (Howard Marks) So beware the enemy within