Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Investors make mistakes. Here's one... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 22, 2009

    Investors make mistakes. Here's one...

    It wouldn't be wrong to call Suzlon a baby of the bull market. The stock, subsequent to listing(October 2005), enjoyed some pretty euphoric valuations for the next two years. As can be seen from the chart, with an average P/E of about 40, Suzlon was a darling of the stock market during those two years of 2006 and 2007.

    Source: Prowess
    The reason? The company was growing, and growing fast. For the five years from FY02 to FY07, the company managed to grow its sales and profits at a scorching CAGR of 72% and 50% respectively. That was enough for Suzlon to garner a very strong fan following. With such a strong upward trend of earnings, people happily paid an average P/E of 40 for the stock during that period.

    This 'upward trend of earnings' has been the nemesis of many a stock market investor. A good showing on this front for a period 5, 4 or even 3 years are many a times regarded as an assurance of uninterrupted future growth and a warrant for projecting the curve of profits indefinitely upward. Especially when the general stock market sentiment is positive. This rising trend of earnings is used as a reason to draw many positive conclusions about the company, thus fueling some very optimistic future projections.

    But like Benjamin Graham has pointed out in the past, there lie some hidden but very real dangers in projecting such trends into the future. More specifically, there are several reasons why we cannot be sure that a trend of profits shown in the past will continue in the future. In the broad economic sense, there is the law of diminishing returns and of increasing competition which must finally flatten out any sharply upward curve of growth.

    There is also the flow and ebb of the business cycle, from which the particular danger arises that the earnings curve will look most impressive on the very eve of a serious setback. And that was the exact case with Suzlon. The world was awash with liquidity during that time. Thus Suzlon, who's products (wind turbines) require heavy capital investments, found no dearth of ready customers. Similarly, due to the upturn of the business cycle, debt was easily available, and that too at attractive rates. This further, made it easy for the company to leverage itself to achieve even higher rates growth and returns.

    This extremely favorable environment was perfect for Suzlon's aggressive decision making, and thus showed up very impressively on the company's numbers. As mentioned above, the earnings curve can look most impressive on the very eve of a serious setback. That's exactly what happened, and the subsequent crash in the stock's price was a very painful reminder of that very fact.

    The above mentioned dangers in projecting trends into the future always exists. But it is just that during bull markets which extend for a number of years, the 'trend-of-earnings' phenomenon tends to become only a pretext to excuse mass speculation under the guise of 'investment'. Indeed, the profit-mad public becomes quite willing to accept the flimsiest evidence of the existence of a favorable trend, and project it indefinitely into the future. And as we all know, happy projections can lead to some very silly prices.



    Equitymaster requests your view! Post a comment on "Investors make mistakes. Here's one...". Click here!

    13 Responses to "Investors make mistakes. Here's one..."


    Dec 4, 2009



    Dec 3, 2009



    Nov 27, 2009



    Nov 25, 2009



    Nov 18, 2009



    Oct 21, 2009



    Sep 14, 2009


    Shirish Joglekar

    Jun 23, 2009

    I agree with many of the comments posted. I find that many times, one EM article contradicts another written within a week or so. Seems like left hand doesn't know what right hand is doing. EM needs to remove these anomalies in their reports. Everybody who takes the risk of recommending a stock can make mistakes and EM is no exception! However, many times I like their contrarian views.


    Bearish Bull

    Jun 23, 2009

    Hey, but the fact is that after Equitymaster's recommendation of Suzlon with a target of 404, the stock had in fact gone up to touch a high of nearly 460 before the fall!!


    R Sathyamurthy

    Jun 23, 2009

    Yah! investors think that trends continue. But people who have read Ben Graham and worship Warren Buffet also forecast income and profits to grow continuously without interruption, in the research reports put out by them with a "Buy" recommendation.

    Fact of the matter is that people can easily think about growth and upmoves, it is difficult to predict when the fall will come. That is why it is better to select a good stock and stick with it rather than buy and sell attitude which is often propagated - even at EquityMaster.

    Equitymaster requests your view! Post a comment on "Investors make mistakes. Here's one...". Click here!

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    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.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)