In mid-2024, my colleague and I met with a significant investor, whom I had prior acquaintance with from my previous organization. The initial discussion centred on the robust performance of equity markets post-COVID-19 and the resulting portfolio growth.

We then transitioned to the expanding landscape of passive investing in India, including fund flow trends and potential product launches. I initiated a dialogue regarding the client's existing allocation strategy, particularly within passive investments. Our firm's then (and current) perspective favoured equity allocations towards large-cap funds. This recommendation was based on the observation that large-cap stocks, despite their post-COVID-19 underperformance, possess stronger fundamentals and offer a greater margin of safety in the event of market corrections.

A Diverging Perspective

The client, however, held a contrasting viewpoint, expressing a strong interest in capitalizing on prevailing market trends. They were particularly drawn to a momentum strategy focused on the top 200 stocks, which had outperformed most other factors over the preceding four years. This divergence in opinion formed the crux of our discussion. We presented the rationale for considering underperforming segments, while the investor remained resolute in pursuing the "trending" factor.

As our CEO frequently emphasizes,

This principle underscores our cautious approach.

The following chart illustrates the dramatic surge of the momentum factor and the relative underperformance of the top 10 stocks during the post-COVID-19 period:

It's crucial to clarify that the chart is presented solely to illustrate historical trends and does not, in any way, represent my ability to predict future equity market performance. I am not a market forecaster, nor do I have the ability to comment on the outlook of markets or equity cycles.

Lessons from Market Cycles

Our discussion was grounded in an analysis of the recent past performance and prevailing fundamental valuation metrics. My perspective is that of an investor first, and subsequently, a result of multiple investor conversations that happen regularly as an employee in the asset management industry.

I have encountered numerous missteps throughout my investment experience and have been fortunate to learn (and continue to learn) from seasoned money managers who have navigated multiple market cycles and have also made their share of errors.

A recurring pitfall, one that many of us still grapple with is:

The irresistible urge to participate in the 'hottest' stock, fund, sector, or factor.

Across various market cycles, the consequences of such behaviour have consistently followed a similar pattern. This observation is not a prediction, but rather a reflection of historical market behaviour."

The Greatest Leveller in Investing

Some of us still believe in buying past performance based on the assumption of continuity of similar performance. Yet, history has shown time and again that markets have a way of humbling even the most confident investors.

The ultimate truth in investing remains unchanged:

Past performance is never a guarantee of future performance.

In a world obsessed with speed, it’s easy to believe that constant action leads to success. But sometimes, staying still is the wisest move

The world rewards those who move, but only when they know when to stand still.