The rally this year has taken a majority of participants by surprise. The general feeling on the Street is one of dismay and disbelief the exact ingredients that make the markets go higher. However the peculiar thing about this rally is that the beaten down names(irrespective of business fundamentals) have gone up the most, This rally has not looked at cash flows, earnings, dividends, growth, management so anyone who looked for reasons in this rally hasn�t found one � except that the ones that went down hard rebounded the most.
In any case the ones who have latched on to the beaten down names have a few critical questions to answer for themselves.
1) If I was bullish on Jaiprakash or Sintex could I have waited for Rs 60 and Rs 50 or would have invested into it well before that and have just seen a ride back to the surface after remaining underwater for a few months?
2) Assuming that I caught the bottom what percentage of the portfolio could have been bet on such names for wealth creation with risk management.
3) What was the likelihood of staying invested in such names for the entire 65%- 75% of the rally from the bottom and not cashing out at the first 25% of the move?
4) When is it proper to exit such names as with these companies we need two correct decisions �the entry� and �the exit� whereas with secular stories we need just one correct decision �the entry�.
How-ever it is not just the �dirty� names that have done well. Companies like Titan, Jubilant Foodworks, TTK and Bank of Baroda have appreciated by between 40%- 60% from the lows. Given an option between making a 75% in Jaiprakash and a 55% in Titan it is clear where an investor would like to bet. Such betting is important not because we make lower return in a Titan but because we can put more money to work and in this market the size of return matters more than the speed.
In pure market terms it does not matter whether money is being made in a Reliance Power or a Bata because money has no colour. The only concern is that the dirty money has a greater probability of disappearing a risk that all investors face irrespective of whether they are in the market for ten months or thirteen years!
One of the most debatable aspects of investing is that when people do not understand and cannot ascribe reasons to stock price movements they get the liquidity argument in. Can there be any movement in asset classes without liquidity? All asset inflation is a result of liquidity infusion as all declines are explained by removal of liquidity. So trying to justify all stock price movements through the liquidity argument is like saying there are more buyers than sellers and vice versa.
........... continud on Basant's Corner........... continud on Basant's Cornerbasant2012-02-19 00:48:00 Great way to advertise the service!
[QUOTE=koolvalue]This highlights one thing that good or dirty all stocks
are cyclical and trick is identifying next cycle---[/QUOTE]
Very aptly put Basant Sir.
These so called financial experts ascribe every upward stock market movement to liquidity just like our politicians blame Pakistan for every small cracker that goes off in any part of country!!!
Well said. There is lot of dirty money in the current market.
The key point that we all never focus on and that Basantji is highlighting here is, how much allocation can you make to these potential 1000 percenters.
Its easy to figure that if something has fallen from 200 to 10 then potentially it will bounce back much faster - but can you allocate 30% of your portfolio to it and see it go from 10 to 7 and then from 7 to 30, then back to 15 and then to 45 and so on.It will drain us emotionally.
So instead of making a 5% allocation and a five bagger in a bad name, do a 30% allocation in a good name and you just need a doubler to achieve the same absolute result. I think that is the jist of the article.
whatever said we cannot deny presence of easy dollars
in Indian stock markets--
Considering our political leadership,cast based politics,
political subsidies,credibility of political leadership,
corruption,discriminating business policies hard earned money will never to india.
FOR those FIIS who are investing in INDIA,LAS VEGAS slot
machines offer better payout ratio with similar thrill
of gambling.
Koolvalue, I appreciate your thought but I do not agree that we are worse than other markets. Our market PE is much better than Korea, Russia, China, Brazil etc etc only because our companies have better corp. governance, return ratios and that's what matters for an investor. Govt. is extremely supportive to local companies in other three of BRIC nations but do they get higher discounting? an emphatic no! All these problems you have mentioned are part of evolution process for an emerging market. USA was full of mafia owned businesses in early 20th century but that did not stop it from becoming world power. We will take time but things would improve in long term. At least I remain hopeful.
Whatever little I have learnt in my small investing phase of my life, I have learnt two simple things;
1. An investor must be an eternal optimist.
2. One must buy companies, not markets.
Raj
Well an alternate viewpoint is that when you get into a line of least resistance pointing upwards, it might sound awkward but the highest betas would give u a better return in short term than the larger ones.
After all how many times have we seen the beaten down names are 'assumed' cheap and bought into the bull market for a great 2-3 bagger.
It might turn that a Hindustan Dorr or REC gives u a better return than an HDFC bank or Page or Cravatex.
It might make some sense to allocate a small portion and play the rally buying into the lesser favorite names of the last bear market - only if you can lose that portion and still sleep tight at night.
Who know you might have thread up at TED 'Building up a Portfolio at Sensex 28000' by Dec2012.
After all Dirty picture has sweep ed all awards - will the stock market show us the dirty game!!
~Supratik
Posted on:2/19/2012 9:23:12 AMluke123
[QUOTE=FutureBull]Thanks Basantji for this timely article!! I just think that in stock market there is tendency to revert to mean.
I have a question to ask like everyone else. Is this a new bull market or just final bounce before most of the stocks including beaten down names go for final capitulation. In 2009 too market went up and beaten down names were multibaggers but that was not sustainable in hindsight. Is this different? Again, we will know in hindsight but the way tainted names (ADAG grp etc) have gone up doesn't bode well for all of us.[/QUOTE]