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Microcaps-When will value.be unlocked?
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Message Icon Topic: Markets move first, reasons follow later! Post Reply Post New Topic
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basant
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Quote basant Replybullet Topic: Markets move first, reasons follow later!
    Posted: 26/Nov/2011 at 9:37pm
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.

Edited by basant - 27/Nov/2011 at 9:13am
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THEINVESTOR
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Quote THEINVESTOR Replybullet Posted: 26/Nov/2011 at 10:05pm
Great Article Basantji. You perfectly explained the distinction between Cheap Stock and Value Stock.
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Quote FutureBull Replybullet Posted: 26/Nov/2011 at 10:08pm
wow Basantji!! I loved the logic, clarity of thought and your writing style. Thanks very much!! I do remember when you wrote that "it is time to bet on economic cyclicals right at the bottom of Feb-mar'09". I am just worried that we do not have any Lehmann event yet but market is down by 25% and currency 20% from the top. We should be fine if we do not have any of the events of that type again.
‘The market always does what it’s supposed to — BUT NEVER WHEN’.
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Quote danielcraig2011 Replybullet Posted: 26/Nov/2011 at 11:59pm
Excellent! I was trying to do the same; bottom fishing just looking at the fall in prices without caring about the fundamentals.
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contactpiyush
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Quote contactpiyush Replybullet Posted: 26/Nov/2011 at 12:24pm
Dear Basantji,

An extremely well researched and written article. I observed that the price ranges make a lot of sense and indeed only those articles/news flows are highlighted that suits that price movement. Initially I was a bit skeptical about this finding, your views on it has reinforced the faith

Thanks for the article ..
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conservativeinv
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Quote conservativeinv Replybullet Posted: 26/Nov/2011 at 1:09am
Basant, good article.
 
I would differ with you in one respect - I believe in the theory of price and time correction.  We have seen the former in 2008 and now, but have we seen the latter?
 
I believe the market still has a lot of pain left.  Individual scrips may take a different route, but the overall market still has a long haul.
 
One of my other observations is that during the start of a bull market, the leaders move much higher first, then the mid and small caps.  Similarly, during the start of a bear market, the small and mid caps move much lower first, then the leaders.  So, have we seen the leaders move much lower?  If we take the highest sensex of around 21,000 and compare with today's, it doesn't seem so.
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kailasp4u
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Quote kailasp4u Replybullet Posted: 26/Nov/2011 at 7:11am
..we need a 100% gain to make up for a 50% loss.. 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. The 2 best lines I liked, Kudos! An investor should never forget these!
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subu76
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Quote subu76 Replybullet Posted: 26/Nov/2011 at 8:16am
On a slightly different note: It's really heartening to see high debt companies, bad businesees, shady business culture companies getting killed.
 
For the last few years it almost seemed that investors who practise discretion and stick to good businesses are losers. The crash around 2008 did not correct the perception either. E.g. of one such I know of IVRCL
 
Thank fully the market has corrected the excessed big time.
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