When I started investing as a young impatient, restless and a (self styled ) astute & logical investor I wanted reasons for everything that the markets did. It took me several years and plenty of failed opportunities to understand that in majority of cases markets moved first, reasons followed later while debates continued thereafter. This sequence of events continues even today where market variables have increased in terms of news points, the logic has become more precise and hard-hitting with more information from the TV and the internet. All these has however not been able to change the end game for the investor which is�Markets move, first reasons follow later�.
For someone like me I have given up assigning reasons and levels since 2008. Benjamin Disraeli said �What we learn from history is that we do not learn from history�. This applies to pinpointing reasons for short term market movements and�erronously assigning credits in the �I told you so� mode. These self-styled forecasters mistake the randomness of events to self- generated intellect. Our markets are passing through a similar phase. We have been assigning the movements to various reasons based on the recency effect and when there is no recency element we put the blame on the Govt. for its sheer inability to govern or in the more sophisticated language �governance deficit�. How many of us wanted to put failure of the Govt. to undertake second generation reforms as one of the primary reasons for our stock market to go down and when the Govt finally plunged in hitting two birds with one stone (FDI in retail and Companies Bill) the markets obliged � by sliding 150 points the next day. Basically the markets seem in no mood to listen to any good news and wants to catch all the bad news this is the classic feature of a bear market or as some eternal bulls (me included) like to say a bearish phase!
If the trend does not reverse very quickly then the bullish times seem some distance away. There are so many stocks quoting at 2 year lows and several at 2008 lows.The underlying reason is that markets want to go down and are going down. How else can you explain scores of companies trading at PEs of 4 and 5 times, RoE of near 20% and a yield of 4%? The stock keeps going down and the yield keeps looking better but one has to bet on them at the right time. Somewhere down the line we will be able to make that quick money buying the beaten down names but personally I would attempt those opportunities only when I�m sure of downside protection. If in the event we miss some so be it because we need a 100% gain to make up for a 50% loss and the probability of doing foolish things go up when a person is on the losing table � he gets desperate.
In this backdrop even though I consider myself a part owner of a business (more refined word for a long term investor) I have started to pay more attention to prices on the screen and the emotions on the street when it comes to buying cheap stocks. As markets fall the cheap stock becomes cheaper and when they rise the costly ones become more expensive. One single data point of analysis is to look at whether the stock you own is nearer to the 52 week high or the 52 week low. In either case the line of least resistance as Jesse Livermore wrote about one hundred years ago acts as a magnetic force � and that force is in complete contrast to what a value investor thinks.
The call of the hour remains to stick with fundamentally strong stocks rather than try to bottomfish for the beaten down names. The beaten down names look cheap but are devoid of earnings visibility. We will ride them when it seems that it is fit to ride. At 20 times trailing the human mind choses to think of L&T as a cheaper stock to another alternative with more predictive earnings just because L&T is down from its 2008 high. The fact that there is so much of an issue with new projects, falling capex, high interest rates does not bother the investor because he is more focussed on buying what has come down rather than focusing on the twin matrix of value with price or more importantly reality with perception. One stock (NCC Ltd) is down to November 2004 levels. In the interim it became a ten bagger!!!
It pays to lose some opportunities in life rather than be brave and ride against the tide for no martyr has ever collected the gallantry award himself.
Hi Basant ji
Excellent way of explaining the markets. I fully understand that fundamentals play more than any market news.
It is a value addition to my stock market knowledge
Keep writing
Basantji face reminds me of Vishwabandhu Gupta!
http://www.youtube.com/chauthiduniya#p/u/0/VsTgAT-YC8s
[QUOTE=ambore]Well said Basantji. As we are rationally irrational by nature, we find excuses when the market goes down and invent reasons when it is up.
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Its an insightful article. But there are few areas where my thought process differs...it will be among these distressed cos that some winners will emerge and some multibaggers will be born...and the one who now does indepth analysis and takes calculated risk will accumulate wealth over a period of time...
Great Article! Rightly pointed out, market always looks for sustained earnings. A decade before, L&T n BHEL etc seemed to have sustained earnings and today its HUL n ITC. (just examples)
Rightly pointed out by Basant in one of his previous article that biggest wealth creater is a trend.
I would ask Basant and rest..this Consumer oriented trend seemed to have started in 2009, I guess. In 2 years, some midcaps and small caps have move up like never done in last 20 years. Is the market pricing in sustained earnings for say next 5 years already? I have no answers from my own research on this..expert comments?
Gud article gives motivation.But Investable stocks are not falling in this market also.Good stocks remain expensive.Really liked the last line.
[QUOTE=MR TED]Great Article! Rightly pointed out, market always looks for sustained earnings. A decade before, L&T n BHEL etc seemed to have sustained earnings and today its HUL n ITC. (just examples)
Rightly pointed out by Basant in one of his previous article that biggest wealth creater is a trend.
I would ask Basant and rest..this Consumer oriented trend seemed to have started in 2009, I guess. In 2 years, some midcaps and small caps have move up like never done in last 20 years. Is the market pricing in sustained earnings for say next 5 years already? I have no answers from my own research on this..expert comments?
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Excellent question. These stocks seemed to have performed on the back of recession, rising inflation and people cutting back on their consumption. People seem to be eating rice like never before over what economists tend to see them consuming more milk, meat , chicken,etc. This trend will end soon with the old sectors taking over.
Thanks a ton Basantji for these Golden Words of wisdom
Very good article Basantji. Thnx
Posted on:11/26/2011 10:45:09 PMambore
Well said Basantji. As we are rationally irrational by nature, we find excuses when the market goes down and invent reasons when it is up.