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The Equitymaster Research Digest

Stocks Paying the Price of Cash. Look Out for Our Best-Buy Blue Chips!
Nov 22, 2016

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The BSE Sensex has corrected about 6.3% since 8 November 2016. But nearly one-fifth of all BSE-500 stocks have shed about 25% of their market capitalisation in the past month.

It is not that the fundamentals of these businesses have changed. But most are paying the price of 'cash'. Demonitisation is hurting businesses that depend on cash transactions. No doubt this could impact their earnings over the next few quarters, but it would be a mistake to take the market's verdict at face value.

Howard Marks of Oaktree Capital, who memos are almost as popular as Buffett's letters, once explained such a scenario...

  • First of all, if we thought markets were always right, then we should not be in this business of investing. Because if the market prices were right, then there would be no such thing as buying a bargain or selling an overpriced asset. So number one, we have to believe it is a prerequisite for our engagement in this business to believe that markets make mistakes and the greatest market mistakes are driven by emotion - either too much greed or too much fear, too much optimism too much pessimism and not by analytical mistakes.

    Groups of people are subject to mass hysteria and so at the extremes, my experience of almost 50 years tells me that when things are going well, people get too excited and want to buy too much at prices that are too high and when things are going badly, people get too depressed and want to sell too much at prices that are too low and that does not mean that you can make money by buying every day the market goes down and by selling every day the market goes up. It merely means that you should be alert to the errors of the crowd especially at the extremes.
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