Liquidity Rules

Markets are hitting new highs every week. But, economic fundamentals don’t seem to support such a prolonged rise. Economic data is definitely mixed. Problems in our economy are on a slow mend. Yet, we see unprecedented buoyancy in our stock markets. IPOs now look like safe lotteries.

We have seen such scenarios before. It is not new to our markets. Liquidity can cause undue exuberance. The investment actions we take in such times are critical to our long-term investment performance. It is important to not get carried away. Investment choices must be strictly made based on valuations. Longer term choices can be made by deferred purchases of investments.

The markets can become even more exuberant in the near future. Investing can become even more challenging in the face of increasing flows and liquidity. Prudence should be abundantly in play during such phases. It is important not to let emotions get the better of us. Near term upside must be sacrificed for long term safety of portfolios.

A value driven approach to investing would greatly help tide through such irrational times. That is an enduring market lesson from the past.

 

“An ounce of prudence is worth a pound of cleverness.” – Baltasar Gracian

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