In a bull market... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

In a bull market...

Jan 12, 2004

A galloping stock market has once again generated a wave of optimism among investors. And research houses too have done, and are doing, their bit to contribute to this new found euphoria. But before you, the investor, latch onto any of the new buzz words/theories/ratios being 'pushed' by these research houses, it may be worth your time to take a glance at what happened in the not so distant past. Yes, we are referring to the stock market boom, and the subsequent bust, of year 2000. Typically, in a rising stock market, traditional valuation metrics like P/E (price to earnings), P/CF (price to cash flow) and MCap to sales (market capitalisation to sales) take a backseat and new valuation tools like EV/EBIDTA (enterprise value to operating profit) and PEG (price to growth) assume importance. And this happens for an obvious reason i.e. to justify expensive (by traditional measures) valuations.

So for example, if a stock has crossed the sell limit based on P/E (and therefore should be a Sell), EV/EBIDTA or PEG is used to justify upgradation in target price or make the stock look like a Buy. Even if this is not working out, P/E limits itself are 'reset'. What people forget is that irrespective of a bull or a bear market, long-term growth prospects of a company/sector do not change drastically. And it is important that investors keep these fundamentals in mind. Theoretically put, in the long term, the stock price of a company should equal its earnings per share. In effect, when you pay a multiple of that, you are expressing your belief that the company will do well over a period of time to make up for the 'premium' that you have paid. So if you a pay a higher price today, you have to wait that much longer for the company to earn that differential. Of course, in some cases, the companies either never make up for this differential or they do not last long enough to be able to do so!

So the next time a broker approaches you with a 'story', don't just buy it!

And finally, one more thought for our readers. Giving a Buy/Sell recommendation based on 'research' does not mean that the same will turn out to be correct. Another point worth mentioning is that the quality of research has little to do with how foreign or 'unforeign' your name sounds. When you look at research, assess its credibility before you act on it.

Just to drive home the point, we have collected some data on calls that have gone wrong, to put it mildly. And yes, we too have gone wrong, and rightly find a place in this not so pleasant list!

Bulls rage...
CompanyResearch / brokerage
Date of reportAnalysisCallPrice
Price target
Low since the
report (Rs)
% change
VisualSoftMotilal Oswal4-Aug-00FBuy3,753 NA 61 255 -93.2%
ZeeMorgan Stanley Dean Witter6-Mar-00FStrong buy1,307 1,985 62 164 -87.4%
NIITICICI Sec21-Nov-00FBuy1,628 NA 87 251 -84.6%
MastekMotilal Oswal20-May-00FBuy1,710 NA 57 316 -81.5%
Aftek InfosysKR Choksey7-Sep-00FOutperform1,550 2,500 76 461 -70.3%
ZeeDSP Merrill Lynch3-Jul-00FBuy496 910 62 164 -66.9%
CinevistaDSP Merrill Lynch28-Nov-00FAccumulate148 NA 19 47 -68.2%
InfosysCLSA2-Feb-01TBuy6,500 NA 2,187 5,795 -10.8%
BSE-SensexCLSA2-Feb-01T-4,286 9,000 2,600 6,133 43.1%
i-flexEquitymaster13-Jan-03FSell420 NA 415 820 95.2%
Ashok LeylandEquitymaster14-Jun-03FSell115 NA 82 287 149.6%
TVS MotorsEquitymaster3-Apr-02FSell37 NA 35 112 202.7%
(Prices adjusted for bonus/splits),* on the date of report
F= Fundamental, T=Technical

Following are some of our thoughts:

  • A bull market or a bear market does not change the risks involved in equities. Equities are a high-risk investment avenue. Risk and return are proportional.

  • Fundamentals do not change overnight. The long-term fundamentals of the Indian economy have been steadily improving over the years. It has taken about four to five years for factors like interest rates, inflation, forex reserves and other policy measures to turn favorable. What has changed in the last six months is that monsoons have been good.

  • More importantly, someone once wisely said "The only person who makes money while you 'trade' in the stock market are the 'brokers'.

  • If you are not able to devote adequate time to selecting and investing in stocks, go in for mutual funds.

Equitymaster requests your view! Post a comment on "In a bull market...". Click here!


More Views on News

An Important Hurricane Update for Energy Traders (Fast Profits Daily)

Sep 22, 2020

In this video, I'll show you how the extended hurricane season in the US will affect traders in crude oil and natural gas.

Mutual Fund Investors Will Now Be Allotted Units Based on NAV of the Day AMCs Receive Funds (Outside View)

Sep 22, 2020

PersonalFN explains how SEBI's new circular on mutual funds impact investors.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

How Much Money Should an Investor Set Aside for Trading? (Fast Profits Daily)

Sep 21, 2020

In this video, I'll give you a simple equation which you can use to decide how much money you can set aside for trading.

Kotak Standard Multicap Fund: Strategizing Growth with Focused Approach (Outside View)

Sep 21, 2020

PersonalFN's analysis on the features and performance of Kotak Standard Multicap Fund.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 22, 2020 (Close)