Has Your Barber Started to Give You Stock Tips?

Jul 1, 2021

As the market hits new highs, corrections barely last a few hours or a few days.

The mood is pretty upbeat on Dalal Street.

However, to sober my excessive optimism, once every few days I come across articles predicting gloom and doom.

Initially I ignored most of them.

However, the frequency of these predictions have accelerated recently.

This is happening as the Nifty approaches an all-time high of 16,000.

The questions which naysayers are asking are...

  • Looking at the market's valuations, have we at least peaked for the short to medium term?
  • Isn't the run up too fast? One year stock price targets of brokerages are achieved within weeks.
  • What will happen when the central banks all around the world stop printing money to tame inflation?
  • Why is there no relation between economy and the market?

So has the market peaked?

Or are we in a bubble?

These are intuitively the same questions but have different interpretations.

If we are in a bubble, it will mean a crash is imminent.

If markets are peaking we could see a sharp time correction in the short run.

There is no doubt we are in a massive bull market. So once in a while it's pertinent to keep a check on what stage of the bull market we are in.

Let's start with some investing banter by Peter Lynch, former manager of Magellan Fund at Fidelity. He is one of the most successful and well known investors of all time.

Peter Lynch coined a famous theory to measure various stages in the market.

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He called it - The Cocktail Party Stock Market Indicator.

    In the first stage of an upward market - one that has been down awhile and that nobody expects to rise again - people aren't talking about stocks. In fact, if they lumber up to ask me what I do for a living, and I answer, 'I manage an equity mutual fund,' they nod politely and wander away.

    In stage two, after I've confessed what I do for a living, the new acquaintances linger a bit longer - perhaps long enough to tell me how risky the stock market is - before they move over to talk to the dentist. The cocktail party talk is still more about plaque than about stocks. The market is up 15 percent from stage one, but few are paying attention.

    In stage three, with the market up 30 percent from stage one, a crowd of interested parties ignores the dentist and circles around me all evening. A succession of enthusiastic individuals takes me aside to ask what stocks they should buy. Even the dentist is asking me what stocks he should buy. Everybody at the party has put money into one issue or another, and they're all discussing what's happened.

    In stage four, once again they're crowded around me - but this time it's to tell me what stocks I should buy. Even the dentist has three or four tips, and in the next few days I look up his recommendations in the newspaper and they've all gone up. When the neighbours tell me what to buy, and then I wish I had taken their advice, it's a sure sign that the market has reached a top and is due for a tumble.

The Indian version of stage four of the cocktail party theory is when the paanwala or the barber start to give you advice on which stocks to buy.

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It's extremely difficult to predict a market top and cash out in time.

But let's look at the warning signs and try to figure out what stage of the bull market we are in.

Concerns raised by bears Defence by bulls
1) Expensive valuations Corporate profits to GDP is expected to see a sharp increase. This will moderate valuations
2) Rising inflation will force central banks to raise interest rates An event which is likely to happen later rather than sooner
3) Higher retail participation Retail investors have equal access to data and are more financially literate due to technology versus the 2008 bubble
4) Penny stocks on an up move without fundamentals Valid concern
5) IPOs listing at crazy valuations Valid concern
  1. Expensive valuations

    Nifty is trading at a P/E ratio of 33-34 times. This is extremely expensive on a historical basis. However we have to understand equity markets will always value companies and indexes on future growth.

    Corporate profit to GDP ratio measures the contribution of company profits to GDP. This was at a historical low of 1.6% in FY20. This has bottomed out.

    In fact for FY21, in spite of the pandemic corporate profit to GDP ratio shot to 2.6%.

    Going forward as profits increase, we will see a moderation in Nifty's P/E ratio.

  2. Hike in interest rates will lead to money flowing out of equities

    The basis of this bull market has been tied to the loose monetary policy adopted by central banks across the world.

    However, someone has to pay the price for 'free money'. It's generally in the form of inflation. The US Fed has called the bump in American inflation as 'transitionary'.

    I believe the biggest risk to the emerging markets equities will be tightening of monetary policy by central banks. However, this is likely to happen later than sooner.

  3. Higher retail participation

    Over the years, there has been a notion that retail investors are the last to enter the market when the euphoria is at the peak.

    If true, this was a thing of the past, where information arbitrage was a key in making money in the Indian stock markets.

    The pace of technology and media has led to wide and easy availability of information among all the market participants.

    The rise of the millennials is also a trend to watch out for.

    Recently Angel Broking in its conference call highlighted two emerging trends -

    A majority of their growth in the last one year has come from tier 1-2 towns.

    And 70% of their new customer additions are below the age of 30.

    this is due to the internet and an increase in financial literacy.

  4. Penny stocks are on an up move

    This is a cause of concern. I wrote about it in my previous editorial - The One Thing on Which We Will Never Compromise.

  5. IPOs listing at crazy valuations

    I think this is also a cause of concern.

    A majority of IPOs are in a bubble territory without fundamental support. Making a 60-70% gains on an already overvalued IPO on listing day has all the ingredients of a bubble.

So that leaves us to the most important question.

In which phase is the market currently in?

My answer to that is...

My barber still hasn't given me advice on which stock to buy. However, he did ask me for some trading ideas!

What about you? Has your barber or paanwala started giving you tips on the market?

Let me know.

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

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1 Responses to "Has Your Barber Started to Give You Stock Tips?"

Prabhu Dayal Sahu

Jul 1, 2021

Your suggestion that the barber has not yet given suggestion on what stocks to buy suggests the most appropriate stage of the bubble in the market.But in my opinion the peak might be closer than what we expect.History tells us that the crashes have always caught us unawares.

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