Beware of the Investor Behaviour Cycle

Posted On Monday, Jul 07, 2014

India’s GDP growth has been hitting new lows primarily due to collapse in the investment cycle. Investment gurus and TV pundits are urging investors to increase allocation to equities suggesting that the investment cycle is close to bottoming out and is all set for a strong rebound. However there is another cycle namely the ‘Investor behaviour cycle’ which tends to have an even greater impact on the end returns an investor eventually makes.

A typical investor behaviour cycle starts with optimism driven by a change in the environment. Investors allocate some savings to equity hoping to make positive returns. As more and more investors start investing in equity their return expectations are realised as the market continues to move higher. With return expectations met, recency bias kicks in (extrapolating most recent events into the future, in this case positive returns). Investors not only reinvest their original savings and returns but in fact increase allocation by putting in more savings (in some cases using leverage). This phase coincides with euphoria as the market starts hitting new highs. One sees a host of equity issuances as promoters lap up the opportunity to raise cheap equity. Risk is thrown out the window and the rising tide of liquidity lifts all boats, money making becomes extremely easy. All investors start believing they are investment geniuses, as any stock they invest in, is up 25% in a week with a lot more upside to go. All this continues till an event in the environment forces people to start looking at risk again. As investors book profit share prices tumble and as more and more people start selling, the cycle in reverse this time, reinforces itself.
Here is a graphical representation of investor behaviour it is:

Investor Behavior Cycle it should be:

Investor Behavior Cycle

In India’s case a weak multi party coalition being replaced by a strong single party majority was a reason to be optimist. We have seen a sustained rally in equities since August 2013, firstly driven by anticipation of a change in government and then in hope of potential structural reforms initiated by the new government. The early optimism seems to have now reached a stage of euphoria as a host of penny stocks hit circuit filters every day. New issuances which had dried up over the last three years suddenly have resurfaced primarily via the QIP market (a lot of them by companies tethering near bankruptcy which have been thrown a lifeline). The IPO market will start buzzing sooner rather than later. Downside risk is a term not heard often.

How long this euphoria lasts is anyone’s guess. But we do know that expectations in the market are running high with risk averseness running low. Investors would be well advised to ignore all this noise and focus on fundamentals alone. A stock specific approach focusing on company’s long term earnings potential evaluated against its risk is well advised (which is the process followed by Quantum Long Term Equity Fund*). Everything else is best ignored.

Also, when it comes to your investments, your redemption should depend on your financial goals. A mere guess should not hamper your investments and your potential to earn better returns. As an investor you should also consult your financial advisor before taking an important investment decisions.

*Product Labeling

Name of the SchemeThis product is suitable for investors who are seeking*
Quantum Long Term Equity Fund
(An Open-ended Equity Scheme)
• Long term capital appreciation
• Investments in equity and equity related securities of companies in S&P BSE 200 index.
• High Risk (BROWN)
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Note: Risk is represented as:
(BLUE) investors understand that their principal will be at low risk (YELLOW) investors understand that their principal will be at medium risk (BROWN) investors understand that their principal will be at high risk

Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Please visit – to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

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