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Deepak's Memos

Wealth Letter July 2023: It’s raining new highs


[This is an excerpt from the July 2023 letter to Capitalmind PMS Customers] 

In the Netherlands, there are two lotteries. One is the regular lottery – you get a number, and if they draw that number, you make riches. But there’s another one, called the Postcode lottery. The idea is simple: actual postcodes (which are like Indian pincodes) are selected by random and then, if ANYONE in the winning postcode has actually bought the lottery, they get to share in the prize.

Think of it this way: If you’re living in a certain area and you have bought a lottery ticket, you will win 500 (or more) euros if your postcode is drawn. But if you didn’t buy a ticket, you don’t get any money even if your postcode won! And if your neighbour bought a ticket, he’d win. 

What this causes  is regret. The “What could have been” question. That all you had to do was to buy a ticket, and you’d get as much of the riches as your regular-ticket-buying neighbour. And because of that, you buy your ticket too – and enough people participate that this becomes a multi-million dollar lottery every week. 

This isn’t risk aversion. It’s regret aversion. We simply feel uncomfortable in “what could have been”. This is, unfortunately, the cause of some misery and unhappiness – that “if only we had done X, we’d be better off”. Everything in finance is a little bit of that, almost forcibly. If only we had invested in Bitcoin in 2011. If only we’d switched out our mutual funds to X fund (the house changes every few years). If only we’d bought shares of Tesla right at the bottom. The official concept of a benchmark comparison is effectively, “if only we had invested in the index instead”. 

Regret aversion often happens at market highs as well. That version is “If only we had invested in stocks when they were lower”. I believe that’s the worst of them all, because it makes people frustrated, and then some more and finally they give in and invest at a time when all the warning bells of euphoria are ringing. And given we are at a market high right now, it’s quite likely that some of us – indeed, many of us, are going through this as an emotion. 

The Dutch postcode lottery is still at 1:521 as odds (one out of every 521 chances). The stock market, though, seems to have better odds if we look at the past – a roughly 72% chance of positive returns with the most common being 10-15%. (Our post)


This data doesn’t do anything to prevent regret aversion by much – most regret is behavioural, and by nature, irrational. (This is also why we find aeroplanes  more dangerous, even though it’s more likely that a pedestrian dies in an accident) 

What are we doing? 

We’re fully invested at the moment, across all portfolios. There’s ample reason to be bullish about India, and the valuations are now lower than earlier since companies have added more than 15% on their earnings in the last year, but prices since 2021 are roughly the same. 

Still, performance on markets (and our portfolios) has improved in the last few months. 


We have a one hour video of the Surge India portfolio, with a deeper look at three stocks: LIC, Kaynes and Narayana Hrudayalaya. See it on Youtube.

In Momentum, we have been building a much more robust portfolio through a much better backtesting and simulation system made entirely in-house at Capitalmind. This has helped us make changes to the allocations, position sizes and risk management; it is too early to say, but we will keep improving it to get better performance. Markets are back up in the last few months and that’s helping as well. 

Low Volatility has done relatively well in the last year, and we believe it works very well alongside momentum. Typically, returns tend to amplify in years when the momentum isn’t strong (like the last year) and it’s done exactly that in the last year too. 

Getting a little technical

What are often called “technicals” are simply behavioural patterns that emerge in markets in the stock prices.What you might see above is a “cup and handle” pattern, as it’s popularly known.

Wealth Letter July 2023: It's raining new highs

But the concept is usually defined by human emotions. What happens is:

  • Markets are on a tear and then lose steam 
  • People who invested near the top starting thinking,”I’ll sell my stock as soon as I return to a profit”
  • Markets fall for a while, and make a “bottom” and then recover back to the last high: this forms the “cup” (the larger curve on the chart above)
  • At this point, the last-top-investors think that hey, I’m back to no-loss, so let me sell now.
  • Markets fall again because of such selling
  • But not as much as last time – because there weren’t THAT many investors in the last top. 
  • The smaller drop and reversal back to new highs forms the “handle” (the smaller curve above)
  • The expectation after this is: the sellers are exhausted so the buying pressure should now take markets further up. 

This is not because it’s a pattern invented by drawing lines – it’s because the behaviour of investors is what causes these price moves. The behaviour here is: the investors at the last top who have been waiting for a “break even” to sell their stocks are now done with their selling, and the relative lack of selling pressure tends to take markets higher.

There’s no need to blindly believe market price patterns will work, of course, but when they reflect human behaviour it provides more context. 

The “kehna kya chahte ho” moment:

Getting to the point:

  • Markets are at highs, and that’s a bit scary
  • It’s not usually been a bad time to invest at market highs, in the past. You’d have been better off 72% of the time even after one year. 
  • This is a high after a long time – so earnings have had time to catch up
  • Oh, and the behavioural fear of selling off at new highs seems to have already happened in the last six months.

We love the India story for the long term. What’s not to love? Low inflation (other than tomatoes, but remember, they take only 90 days to grow), high earnings growth, a burgeoning middle class, good credit growth and companies that realize they must cater to a very large Indian market. Still, markets will go through ups and downs, and the short term isn’t driven by earnings, it’s driven by behaviour and liquidity. 

The scale of what’s coming to India is probably unfathomable. I don’t want to sound too bullish though; we’ll take it one step at a time. Here’s hoping that the market will recognize the strength of our economy.

As the monsoon comes in, and we fret the price of a tomato, I’ll leave you with the emotion that the neither-here-nor-there market has left inside of us in the last two years: Nothing lasts forever, even cold November rain.

Letting it rain,




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