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
Edited by basant - 19/Feb/2012 at 12:48pm