• OUTLOOK ARENA
  • VIEWS ON NEWS
  • DECEMBER 6, 2004

What? Fundamentals are strong?

Leading long-term investor Warren Buffett had once remarked, "It is only when the tide goes out that you can see who is swimming naked" In these times, when the Indian stocks markets are on a seemingly incessant run upwards, apart from quality stocks, even those companies that are 'not worth their weight in salt' have seen their stock prices run up. And this calls for the much-needed caution from the investing community.

When one talks to someone who has speculated in such stocks, what one hears is, "fundamentals are strong," or "growth prospects are promising"! What one fails to understand is that as stocks like these rise with the rise in the markets, the chances of falling harder increase for those who have speculated in them (remember the 'invisible' dot com companies of the 2000 crash?).

While we are not trying to take the role of a 'doomsayer' or, for that matter, 'spoilsport', what we are concerned about is the fact that markets are seemingly not taking into consideration the various risks that cloud the horizon. For instance, one of the biggest factors that are helping Indian markets currently is the incessant flow of FII money. However, it is important to note that the pressure on the US dollar on account of the huge US current account deficit has the ability to deepen further.

A rapidly depreciating US dollar may have inflationary effect on the US economy, which might further result in the Federal Reserve raising interest rates faster than expected. With job recovery, consumer spending, manufacturing index all showing good numbers off late, a faster US economic growth has increased the chance of faster rise in interest rates in the US. And this might be a big reason for the 'much-touted' FII money to reverse direction and move towards the much safer US treasury bills and bonds. What more, the rise in US interest rates might also lead to increasing pressure on the RBI to raise interest rates in India.

Conclusion
When economies and industries grow, benefits accrue to both good and bad companies. But as times get tough, and as the real test of companies' strength begins, grain can easily be differentiated from the chaff. While investors have behaved irrationally (sad, but that is true!) at more times in the past than one, those who have identified their risk-return profile well in advance and have set their faith in fortunes of quality companies, have seen their investments multiply. They would, indeed, continue to do so. By maintaining prudence, the chances of going wrong and thus losing money reduces dramatically.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
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