indianotes

Markets are inherently unpredictable, capricious and fickle. We know this, yet we let the actions of Mr. Market influence our own behavior, and often in a somewhat predictable manner.

When markets behave the way we want them to, we pat ourselves on the back and start believing we are great investors. But when they don’t, we look for someone to blame – the Finance Minister or Americans at war, fund managers, research analysts, brokers, influencers and company managements.

We conveniently forget two things: nobody can predict the future, and nobody is completely unbiased. Every participant in the market operates within a set of incentives and constraints that shapes their version of truth – and therefore, what they say and do.

Brokers make money when you trade or borrow on margin. Their incentives favour frequent activity, so their advice is more focused on short-term, trading ideas. Even “long-term” recommendations rarely extend beyond a year.

Fund managers have a different problem. They are expected to remain perpetually bullish. Even if they believe that the market, or a segment of the market is over-valued, they have no incentive to spell it out. If they do, we will dump their funds and they may lose their jobs.

Which is why we hear ambiguous phrases like “investors should lower expectations” or “despite high valuations, the structural growth story remains intact”.

I’ve only seen this convention broken once – by Mr. S. Naren, the CIO of ICICI Prudential MF.

In January 2025, he described median valuations of small- and mid-caps as “absurd” by historical standards, and and went so far as to say, “We think it is a clear time to take out lock, stock, and barrel from small- and mid-caps.”

His comments kicked off a huge storm. All kinds of people criticized him, including competitors and advisors who were pushing such funds. Media (including the social type) took his words out of context, and some suggested he was predicting a market crash. Others blamed him for the market correction that happened a few weeks later.

His concerns about valuations were borne out by subsequent events. But whether he was “right” or “wrong” is beside the point. What is remarkable is that Naren was willing to publicly state an opinion that could have had negative commercial implications for his firm, his career and his popularity.

This is extraordinarily rare!

Company managements are probably in the toughest spot. If they signal a bad quarter or year, their stock will get pummeled in the near term. If they are too optimistic about the future, they run the risk of being ridiculed later on – for not keeping to their “guidance”. And nobody, ever, will say their industry is in decline, or in a down-cycle!

Don’t judge them too harshly. A negative outlook can demotivate employees, partners, distributors, dealers, suppliers and of course, shareholders. None of us would behave differently if we were in their place.  

Most influencers too, are running advisory or PMS or some other related business. This is not to say that they will misguide you, but we have to understand that their motives or incentives may not be aligned with making us rich.

Again, this is not dishonest or wrong. It’s simply the way the world (or market) works.

Everyone is biased. Every person commenting, writing or recommending has an axe to grind or a history that shapes what they believe.

Yes, even me!

When it comes to investing your hard-earned money, don’t confuse incentives with morality. Do listen to the “experts”; read what analysts, fund managers and promoters have to say. But before you plunge in, try and understand why they might be saying it.

In the end, remember that nobody is here to make you rich.