Markets: Are you looking at the rearview mirror? - Views on News from Equitymaster

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Markets: Are you looking at the rearview mirror?

Dec 15, 2005

Don't, you will miss what is ahead and eventually bang (hurt) yourself! With the benchmark indices continuing their northbound journey, and breaking all their previous records, people seem to be increasing the cash component in their portfolios. Also, their habit of looking at the past has not gone and if one envisions a car, if a driver keeps looking at the rearview mirror, he might be able to protect an accident from behind, but will clearly miss out on what's happening ahead and eventually bang it from front. We do not say that one should ignore the rearview mirror totally, its good to give it a glance once in a while, but the focus should be on the front, i.e. on the road. It seems that people are more scared than celebrating as the index nears the 5-digit arena. In the sixties, the Japanese markets set off on a bull run that lasted close to a quarter of a century, and we are already getting panicky with less than 3 years of it. We are in the midst of an economic shift, and hence when a bull run ends is anybody's guess.

In our view, ultimately everything melts down to justifying valuations. Today, an Foreign Institutional Investors (FIIs) might be ready to give a stock a P/E multiple of 20x its forward earnings, while an Indian counterpart will be comfortable only with 15x its earnings going forward for the same period. Who in this case should we say is right? The thumb rule says that if a company's profit are growing at 15% YoY for a consistent period, it can be given a P/E multiple of 15x and if 20% the 20x and so on and so forth. However, one must keep in mind that there are other factors like economy scenario, sector outlook, etc that also need to be clubbed in while projecting, and then arrive at a suitable valuation.

In conclusion, we would like to say that there are yet stocks in the 7,000 odd scripts listed on the bourses (although only a handful of them), which have some value, left in them. One should look at a stock with its consolidated picture in mind and not a standalone one. India is a hotspot for FII's, and money is waiting to be poured in, which is visible, as with even the slightest of corrections, investor's frantically start buying and the result is that the indices rebound. One should buy into fundamentally sound stocks with good management teams and strong growth prospects that will stand the test of difficult times as the long-term story, we believe, is still intact and there are still opportunities to make good investments. One needs to be patient and the rewards will come.

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