Why Buffett's tenet on greed doesn't yet apply to Indian equities

Unlike other occasions when the market hit all-time highs, this time the surge is not greed-driven

My good friend, who religiously follows Warren Buffett, asks if this is a good time to sell Indian stocks, as markets here have hit new highs. Logically, it seems he’s right. And not just my good friend, but most us have been wondering whether or not this is the best time to sell stocks.

My investor friend was particularly basing his decision on Buffett's famous quote: "Be Fearful When Others Are Greedy And Greedy When Others Are Fearful".

Since the Indian equity indices are now hitting new all-time highs, there is, of course, the need to be fearful.

But, is there greed at present? Does it make sense now to follow Buffett's tenets and get out in the belief that the all time-highs have been driven by avarice?

My friend has been right on several occasions. He sold most of his holdings in 2008 when the Sensex was at around 19,000. He was worried he had not held them to the cusp (when the Sensex hit 21,000), but was happy that he was not party to the irrational buying, which later proved to be illusory as the Sensex thereafter tumbled to almost 8,000.

When the world was crying, he was actually cheering and praying for the markets to fall. He did not buy when the market had bottomed out, but started purchasing stock at around 11,000. He perceived the huge fear in the market when equity was the most vilified asset. He realized that that was the best time to buy, when people were afraid and there were no purchasers, only stressed sellers looking to quit at any level irrespective of fundamentals.

 In such a manner he was Street savvy. Today, when I ask him about it, he reminded me again about the Buffett's famous quote:

"What the wise do in the beginning, fools do in the end"

This time, though, I doubt that he got it right. Buffett never intended to relate the term 'greed' to market levels or indices. So saying that the markets quoting at all-time highs because people are greedy and that makes a good case for selling seems to be a little less rational.

The father of value investing, Benjamin Graham, taught us that there is something called hope which mediates between fear and greed. Today, there is very little participation from investors,both retail and institutional. Those who have returned to the markets have come because of hope. People do not seem to be gung-ho about equity. I have not heard of investors borrowing to but stocks. I have not seen many IPOs recently, typically the sign of a peak. I have not seen valuations crossing very long past averages. On the contrary, companies and promoters are busy engaging in buy-backs, a banner of hope against the signal of greed.

I have not yet read those scary headlines in newspapers about bulls and booming markets.

I have yet to see my barber suggesting buying a particular stock he'd heard about from one of his Dalal Street customers.

I have not seen low-quality companies stomping fresh highs. At the height of greed, we would probably see abundant liquidity in some of the poorly-managed companies or in illiquid stocks.

Robert Shiller, the author of Irrational Exuberance, once said: "Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others' successes and partly through a gambler's excitement."

Today, that excitement is still non-existent. Investors still lack confidence and faith in equity. And lack of confidence and faith and excitement pre-supposes that greed is not pre-eminent.