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One 'boring' resolution you can make - Views on News from Equitymaster
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  • Nov 12, 2007

    One 'boring' resolution you can make

    Wishes of a prosperous new year ahead are required more than any of the past four years, considering the fact that the global financial and economic system is standing on an edge this time around. Credit markets are in turmoil, crude oil has soared to near US$ 100 per barrel, inflationary concerns are also being stoked by rising food prices and, of course, stock valuations have been on astonishingly high levels.

    The fact that it was the first time in the past 10 years that the BSE-Sensex closed in the red on Diwali's muhurat trading session might not say a lot about what participants can expect in the coming few weeks, or months. But given the global financial and economic situation we are in, and considering that madness has led to stocks trading up to silly valuations (even those that are minus any earnings or business), you can expect some pain to follow in the short to medium term.

    Movers and shakers (BSE-Sensex)
    Company 9-Nov-06 9-Nov-07 Change
    The leaders...
    Rel. Energy 513 1,838 258.5%
    L&T 1,311 4,129 215.0%
    BHEL 1,192 2,775 132.8%
    Reliance 1,261 2,736 116.9%
    SBI 1,130 2,163 91.3%
    ...and the laggards
    Cipla 271 177 -34.6%
    Hind. Unilever 250 193 -22.7%
    Dr. Reddy's 773 605 -21.8%
    Infosys 2,138 1,703 -20.3%
    Wipro 533 460 -13.7%

    Be it stocks from the real estate, retail, capital goods, power or telecom sectors, valuations have reached unsustainable levels to justify even decent returns over a 2 to 3 years holding period. The frenzy has not even spared the companies, many of which have announced either unlocking of value (sometimes out of thin air) or diversification (or diworseification as Peter Lynch would have said) into unrelated areas. You had real estate and even some metal companies talking about their telecom plans. And then you had some from the textile pack taking about their real estate plans.

    The year also saw the appreciating rupee (from Rs 44.57 to US$ to Rs 39.07) taking its toll on companies from the IT, pharma and textile sectors. And the stocks followed suit, thus underperforming the broader markets by a significant margin. With global liquidity gushing in, the Reserve Bank of India (RBI) found it hard to manage the rupee's volatility and could not do much than to see it appreciate to these levels. While we are yet to hear of any strategic decisions from these companies with respect to diversifying their currency base, we expect the sector leaders to make a start sooner than later.

    Now for some usual, boring stuff...
    While the current situation might mean that stock prices can stay volatile in the short to medium term, you, as a long-term investor, can take this market volatility as a way to build a long-term portfolio of solid companies with credible managements. It is imperative to make one's choice by way of doing own groundwork, following the same with conviction and discipline, and leaving aside greed and fear. That could be a good resolution you can make for yourself this New Year. Sounds boring? Try it out and you won't think so by next Diwali!



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