Jun 17, 2005|
Stock markets: What to depend upon?
As indices touch reeling heights and Foreign Institutional Investors (FIIs) continue to pump in money, investment decision in equities become agonizing. One does not know which way to follow. Whether it is the market sentiments or the strong sectoral prospects as predicted in reports and pink papers that one should chase? Or whether one should stick to the time tested norm of evaluating the underlying value of the stock.
When we asked our investors this question, a majority (64%) seemed to rely on 'strong growth prospects', while 21% believed that cheap valuations were of utmost importance. The remaining 15% however, gave in to the 'sentiments'.
Positive sentiments: You must have heard about the 'efficient market' where investors' knowledge magically and correctly sets the best price for a stock. Unfortunately, even when bales of information are available through the click of a mouse, the market is too often inefficient and prices do not always reflect the underlying value. As the legendry investor Mr. Benjamin Graham put it, "The market price is frequently out of line with the true value. There is however, an inherent tendency for these disparities to correct themselves." Undervaluations may persist for an inconveniently long time and the same applies to inflated prices. However, like all other good things, the 'over-optimism' must also subside. While it is true that almost every stock goes up in a bull market, it must be noted that those that are devoid of fundamentals would be the first ones to tumble at the slightest scent of a trend reversal. Positive sentiments should therefore, is not a factor that one should bank on.
Strong prospects: Investors must look for companies that not only benefit from an economic expansion but also survive at the eventuality of a downturn. In an economic upturn, almost any and every company is optimistic. But what investors need to be wary of is whether the figures will be sustainable when the cycle reverses. For investors willing to do an extensive spadework, companies with strong balance sheets, a historical record of earnings (with minimum volatility) and attractive dividend payout must be the green light.
Cheap valuations: As an investor, one's objective must be to pay less than the company's intrinsic worth. A moderate price to earnings ratio is a very useful indicator for a defensive investor. This is because a relatively lower P/E would save investors from paying a very high price that does not justify the value of an investment. Also, a history of moderate or less-volatile P/E's helps the investors' cause. This is because a company that has had volatile P/E's in the past is a case of investors building up 'irrational expectations' of its growth. However, as been seen in recent times, the so-called 'efficient' market has become irrational and is awarding unjustifiable valuations to earnings (say for some mid-caps companies). Thus, at 6,900 levels investors should not only look for good companies but also 'appropriately valued' companies.
In the current times, when the markets are unpredictable, risk can be associated with paying a higher price for a stock that does not justify value of the holding or that already factors in the growth for the next few years. And in these times, it is an imperative for equity investors to give heed to one of the most important concepts of investing known as the 'margin of safety'. The concept widely propagated by Mr. Graham has time and again saved investors from losing their hard earned money in the whirlwinds of the stock market. It only means that investors should keep a reasonable 'gap' between the price they pay and the potential value of their investment. This not only provides a cushion from possible downfalls but also offers better return on investment. The bottomline is that sentiments and prospects are but a temporary phase. If there is one criterion that investors can rely perpetually on, it is 'Fundamentals'. After all, who does not value money? Investments are but a complex version of the same!
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 21, 2017
PersonalFN explains the chief factor pushing gold prices up of late.
Aug 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407