Refrain from Traps

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This quote of Warren Buffet is relevant in the current scenario and days to come. As an investor one should not be greedy when everyone is greedy.

Trying to predict the future based on the current scenario may harm. The overreaction of the pandemic laid to a market crash back in March, since then, the NIFTY index has rose around 35%. Due to lockdown, a large number of retail investors have turned-in to the markets to enjoy the short-term gains.

But is it already a bull run or is there fall to come?

If a stock is already too high and you still feel that it will continue to rise in the coming time, it will simply lead to high risk without high returns and will eventually disappoint you.

If a stock is already above the intrinsic value and still keeps rising from being overvalued and furthermore, you are too lucky to enjoy the highly overvalued stock. When you are unknowingly investing through a fund in a market which is elevating simply because of undisciplined buying may also hurt you hard, even though you are investing in tranches at different levels.

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Many investors would not even think of buying or even selling when greed is picking up. A smart investor would short the stocks in long and would enjoy even in a falling market.

One such example was the big short of legendary investor Bill Ackman during the months of February and March.

He shorted for $27 million bet and amassed $2.6 billion. As the pandemic spread towards the western hemisphere, Bill put a bet against the $71 billion of his bonds by purchasing CDS (Credit Default Swaps), those purchased by Michael Burry during the 2008 crisis. CDS are insurance against the default of bonds.

Bill would have to pay $27 million a month towards premium. The best part about Bill was that he was lucky enough to amass a profit to $2.6 billion within a month. Through this, he picked up stakes in Berkshire Hathaway, Hilton Group, Starbucks, Lowe’s and Burger King parent, Restaurant Brands.

The high liquidity in the markets may lead to funds going where they shouldn’t. When funds go to places where there is a chance of default or bankruptcy, it will only harm you. When you keep neglecting the risk, it simply adds to higher risk.

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Keeping to invest in elevating markets will only elevate your risk and decrease your returns. The fear of missing out should not be there in an elevating market.

As the moratorium will end in month to come, banks will start to report NPAs in the quarter which may impact the already slow rally of the financial sector.

Many PSUs and a few large private might have a tough road ahead. But as the markets are mixed with the recent judgement of SEBI on multi cap funds, Mid and Small cap indices are already set for a strong rally. This has added up too many people’s worries as the markets are already overvalued while the fundamentals are still gloomy towards the road ahead.

But as the investor’s psychology says, excesses correct, there could be a big correction ahead and it could get bigger with the rally ahead. In a short run technical factors play an important role over fundamental factors.

So which way will the markets go in the coming times? Is the bottom already made? Will the markets keep on elevating despite already being at a premium? Is this a Bull Trap? There is more to come!

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Priyansh Chanchani
Fresh graduate in Business Administration with a specialization in Finance. Learner of capital markets and investments.
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