In the 1980s we were brought up with the theory that the job of the markets is a) price discovery and b) resource allocation to the right companies. In the 1990s when we became members of the stock exchanges, we were sure that we were adding value to the customer by doing stock picking. Sebi said ‘brokers’ should not do research, but just buy and sell. I still that is funny, but I am too damn junior to tell the all knowing regulator anything different.

Wall street and Dalal street always made fun of the ‘retail’ investor for having no stock picking ability. ‘We’ were the experts. We knew what to buy and what to sell. Then came the INDEX aka Sensex and then Nifty. Followed by Index based investing. Sure we needed an index but indexing sounded odd. Here the professional was admitting that he did not know what to buy, so he was buying the whole market. Sounded funny, but it worked. The amount of index funds in the USA is mind boggling. A full market index means it covers the whole market – say all the 9000 shares listed in the markets.

New products like etf, index funds, were all admitting that professionals did not know what to buy – AND we were all saying that it was the best thing to do. We were now celebrating what we were laughing at 🙂

So what to do? As usual I had to look at US. The scenario is scary there too. The US market which is likely to grow at 2% p.a. is now at a p/e of 29. This is not very far away from the 1929 crash trigger. Are these prices sustainable?

Now 84% of the funds coming in are on auto pilot mode. ETF, Index funds, Robo advisory – all are growing at a fantastic pace. Will they just keep buying or will they start reallocating to other asset classes as the pe gets to higher levels?

Investors today do not want to invest in direct stocks – they prefer outsourcing it to the ‘professionals’ . Who are saying we cannot create alpha so please go to the index. Great. Today, investors buy and hold (or at least that is how the industry hopes it will happen) regardless of whether entire markets are undervalued or overpriced. I would be wondering what happened to my wealth if say the market fell 28% over a 18 month period. Will these people remain there or run? Will Robo advisory forecast this? Highly unlikely. Nor am I sure how a hug and a kiss from the IFA help if your portfolio is bleeding.

The view of investing that has prevailed for decades — how well you succeed at it is determined by how smart you were, how many balance sheets you saw and how hard you work at it — is gone. Or is it just a passing phase? This is now replaced by a model in which you hope to succeed by buying, buying, and buying more.

There are no easy roads to riches in the markets or anywhere else. So it’s tempting to conclude that when we make investing effortless — and have we make it more dangerous too?

My great grand parents had paddy fields. They grew rice, de husked it and then consumed it. My grand parents and even my parents got the rice from the fields or the shop – more shop than field. My wife gets the idli dough from the shop. My daughter is most likely to buy idlis from amazon.com.

Take investing. We searched for balance sheets – the local ‘raddiwala’ became a friend. Then Google came. Tons of raw data was available. CMIE and Bloomberg gave data in a far better organised way. However if 84% of the money coming into the market comes in mindlessly, I am worried about the volatility a panic could create.

Those investors who can meditate through a crisis will come out stronger, but not all of them are Gautam Buddha. Again look at the US, the mutual fund lobby convinced the govt to put all the pension money in 401(k) into the mutual fund. Government obliged. The US market moved from 10% in indices to 84% Index funds without creating a mad upturn (as of 9 March), US is insanely over priced.