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BW Businessworld

Of Cryptos, Sensex And The Madness Of Crowds

Stay away from the crypto exchanges. Somehow, they do not appeal to good old common sense. There’s bound to be a very hard landing in store for the so-called investors who are throwing the kitchen sink at cryptocurrencies. When? Only time will tell.

Photo Credit : thetechportal.com

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Financial Markets truly have short term memories. And that is one of the many things that make them an exciting place to be in. There’s never a dull moment!

If somebody told me that the SENSEX would be flying past 60,000 eighteen months back when the entire planet was reeling under the throes of COVID 19, I would say, Shakespeare style “surely you jest, Sir!”. And yet, here we are today.

I’ll admit that I’ve been guilty of advising caution since the SENSEX hit 50,000 around six months back. With the bellwether index having rallied a further 20% since then, I can say in hindsight that I was more than a tad too early in waving the danger flag… but hindsight is always 20:20, isn’t it?

Yes, the economy has improved (a lot faster) than expected. The EPS of the NIFTY has very nearly doubled over the past year from ~340 levels to ~660 as on date. But it’s also true that the trusty old price to earnings ratio is still “dangerously high” at 28 times. Agreed that the P/E ratio is too simplistic a barometer of the “go/no go” decision, but we cannot ignore the fact that this is the same level it was at just before the infamous crash of 2008 which destroyed trillions of rupees of investor wealth. The question is, will the economy keep growing at a fast enough clip to keep pace with the euphoric millions who are thronging the bourses with their capital? Or is what we are witnessing here just another example of the liquidity fuelled “madness of crowds”? The truth is, we’ll not know till we know. 

And what about the whole cryptocurrency craze that’s playing out? India now has 15 home grown crypto exchanges – some of them purported Unicorns! We have more than 10 Crore crypto owners in our country – the highest in the world, with the United States and Russia ranking a distant 2nd and 3rd. Most of these “investors” are young (a lot of them are college students who are “investing” their pocket money), and basically ALL of them are completely clueless about cryptocurrencies as an asset class (or is it a currency?). Ad breaks during cricket matches are peppered with advertisements of crypto FD’s that earn 4X the returns of regular FD’s. Celebs are being roped in to add a smattering of credibility. The hurried disclaimers at the end of these advertisements are being skimmed over as a mere formality (unlike Mutual Fund disclaimers, mind you!). And the madness just continues to feed upon itself and build and build. Every “crash” is followed by an equally meteoric rise. But until when? The short answer is – “until the music stops”.

As an investor, what should you do? Well, I’ll stick to my guns and continue advising a measure of caution. That we as a nation are entering what may be called a “bright” phase of economic growth is quite certain, but stocks markets and the economy rarely dance in sync with each other. Increase your asset allocation to equities by all means, but not as a speculator but as a long-term investor with a minimum time horizon of five to seven years. Stagger your way in over the next 6-12 months, and be mentally prepared to hang tight through some rather disconcerting dips that may follow. Consider adding dynamic asset allocation funds in the mix. But whatever you do, do not go overboard and throw caution to the wind, because if you’re unlucky, you could very well end up as the last fool in the whole “greater fool theory” narrative!

And yes, stay away from the crypto exchanges. Somehow, they do not appeal to good old common sense. There’s bound to be a very hard landing in store for the so-called investors who are throwing the kitchen sink at cryptocurrencies. When? Only time will tell.


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