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Be cautious this time around.... - Views on News from Equitymaster
 
 
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  • Dec 6, 2001

    Be cautious this time around....

    That there is a rally in the stock markets is not surprising. What goes up must come down and vice versa. However, investors should be very cautious this time around.

    The reason? Well a rising tide lifts all boats. Therefore, even a not-so-good investment decision makes you believe that you are a star stock picker. This belief ofcourse feeds on itself resulting in investors picking up stocks, which are backed by little or no fundamentals. In the case of such stocks, stories begin to do rounds - a large MNC is likely to pick up a stake in this company or that FIIs are large buyers in that company. Needless to say, such investment decisions end with a number of such investors losing their shirt i.e. when the tide runs out.

    In a market that is attractively valued, investors should focus on building portfolios, which consist of fundamentally sound stocks. Look at this as an opportunity for buying great stocks at attractive valuations. Avoid the lure of once again participating in the infamous group of stocks. We all know how an investment strategy focused on investing in this group of stocks ended in year 2000.

    Let's revisit some of the criteria's investors should look at before investing in a stock.

    First and foremost, it is important that the management of the company enjoys a high level of credibility. This comes with an excellent track record, focus on shareholder value, a proactive approach and high standards of corporate governance among other things.

    Second, ofcourse, is the company's financial performance and its ability to outperform its peers in down turns. Also, it is important that in this competitive environment, the company has taken or is taking measures to secure its position in the industry. With globalisation, it is imperative that the company compares well with global peers, rather than just its domestic peers.

    Third, one must take stock of the operating environment of the company i.e. government policy among others. These issues can be very critical at times. For example, if an industry's survival is dependent on some import restrictions, its better to steer clear when one knows that the WTO guidelines will sooner or later level the playing field.

    Ofcourse, the stock market rally has come as a relief to all investors after the prolonged sluggishness in the market. However, investors need to take steps to ensure that when this rally fizzles out, which it will at some point in time, they are invested in 'businesses' that continue to generate value for them.

     

     

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