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Yeh kya hua? - Views on News from Equitymaster
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  • Apr 1, 2000

    Yeh kya hua?

    Take a stock market that has doubled since October 1999. Add to that a new era of valuation where price to earnings has no meaning and only price to potential has any significance. Spice that up with newspaper headlines screaming stories about the new generation of super-rich. And add the gravy masala that India is in a new age because of its advances in software and what do you get: Nasdaq fever comes to India long before the Clinton did.

    For the past six months, the trend has been your friend. Irrespective of what company's shares one bought, chances were that - if it had any kind of tech story in it - you had made a lot of money. Technology stocks have been taking a bit of a beating in the past few weeks though. Zee has fallen by 36% from a 52-week high of Rs 1,555 to Rs 1,000 levels while Infosys has fallen by 25% from a 52-week high of 12,900 to Rs 9,700 levels. Not that investors did not make money on the upside. If you had bought Infosys at its 52-week low, you would have had a 900% profit while a timely investment in Zee would have given a profit of 1,722%. Not bad for less than 52 weeks of "work".

    But manias and bubbles have this attitude of perpetuating the story for some time and making every attempt to rationalize an exercise in futility. At one point in time, Amazon.com had a market cap which was over 15 times the value of all books, newspapers, and CDs sold in America. Not 15 times the profit but 15 times the selling price at stores. If every American had bought all their newspapers and CDs and books from Amazon and assuming that the profit margin on this business is 15% after tax, then Amazon was at its peak selling at 100 x the earnings it would have received in a 100% market share environment. Sure, the passionate could argue that my numbers above only have the USA market in it and Amazon is a global brand name. And Amazon does not only sell books and CDs, they will sell everything under the sun very soon….

    That is what happens to rationalists in a bubble environment. They are ignored. And rightfully so. For in momentum markets, listening to reason is not the best advice. Watching the share price graphs go north and "buying on the dip" can be a rewarding experience. But is this the end of the technology fever? Maybe it is the end of "valuation of technology fever". Maybe not. But it is not the end of the evolution of technology and how it will affect our daily lives. Technology will survive this blood bath. Hopefully, the investors who got in at the top of the technology market will, too.



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