Just take a look at Sensex, the most talked about indicator of Indian stock markets, which has fallen from 20561 points in January this year to the current level of 16284 points - a fall of 20.80% (31.20% annualised) in eight months. What is more interesting is that it lost 2030 points during the last three weeks. An obvious question is where do we invest during such testing times?
I normally draw parallels between a super market and stock market. People rush to super market when the prices are low or during discount sales. But why do we shy away from stock markets when the prices are falling? If one picks some fundamentally strong stocks at reasonably low price, it would definitely offer great returns in the long run. I would like to add a word of caution: Do we buy anything and everything from a super market, just because they are available at throw away prices; or do we also check the quality? Similarly, it is not advisable to over-indulge and blindly create a portfolio of stocks that are available at very low prices (or low P/E). Pick good stocks and stay put for a long time: I am sure there will be no regrets! Happy investing.
Let me ask a more mundane question? What did really go wrong with the economy during the last three weeks? I would say nothing much. The reaction that we saw in the market is due to two influencing factors: (a) the burgeoning debt crisis of USA and Europe and subsequent downgrading of USA US
Sir,
ReplyDeleteI feel we hardly realize now that there is no value stock or wht we call top corporate name stocks tht will fetch you good returns; you look at tata steel; jsw steel from steel sector; or infra unitech which had touched 90's is now into 20's,
The one most amazing thing is retail investor lose money in falling markets and are without money when the stocks are damn cheap;as with retail investor so called money is not kept on sidelines or retail investor does not work on investing only 70% and keeping 30% cash on hand(as mutual fund houses works)
stay put as volatality is not going to change for 2 more weeks.
Ajoy Sir,
ReplyDeletewhen we say buying at a low P/E, is that mean we compare one script with its industry PE. If we take Educomp Solutions for an example: which has PE of 4.91 and its Industry PE is 8.39. This reflects its growth potentials. Having said that keeping quality and fundamental aspects into consideration as you addressed in above conversations.
Let’s share more thoughts on this.
Thanks
Ramdas Pai
Hi Ramdas
ReplyDeleteComparing the P/E of a firm with that of the industry is a common practice. But I would say while taking investment decisions one must not stick to only P/E. One needs to look at more fundamental factors as P/E alone can be misleading!
hi sir,
ReplyDeleteas a common man if any one is investing, without the knowledge of all these fundamentals of stocks& markets, what he can understand about p/e ratios?
I would strongly recommend retail investors to learn some basics before entering the equity market. Its not all that tough. Another way would be to enter through Mutual Funds (here again, one needs to be cautious).
ReplyDeleteI completely agree with you Sir, on the two major contributors of the current economy. Apart from that, I think there are also some fundamental drawbacks in the Indian economy due to which small investors are the sufferers. The major factors effecting the Indian stock market currently is the liquidity crunch leading to an increase in the bid ask spread. This results in no buyers and which results in the stock prices and the market at large is volatile majorly hitting on the down side. Given this situation big investors and mutual funds short the stocks due to lack of sufficient funds (as more foreign Institutional Investors are pulling back money from system). Thus the market further takes a downward move. But individual investors like us who are not aware of liquidity position would bet on those stocks as “We try to catch the falling knife” and we will be the final losers.
ReplyDeleteBut one good thing about the liquidity crisis in India, as I understand is that very small portion of the economy is in to stock market, thus majority of Indian savings is invested in gold and real asset (which may not be good move in terms of helping stock market, but surely has helped the growing economy as people in India save money and invest in gold and houses rather borrow and buy rule which has brought down the US economy).
But the above investment on real asset has weakened the stock market as big ask and spread(price arbitrage opportunity) is an indicator of inefficient market indicating no competition and no fair price is determined by the market. This leads to monopoly by few big investors and insider trading.
Apart from the above mentioned factor the recent development in the financial sector that is the ETF has also indirectly contributed to the liquidity crisis, as people now trade gold, silver thus money outflow from stock to ETF’s. Given the above factor and the high trading cost has made it hard for a common investors to make some profit from the investments in spite of through study on the fundamentals.
Please correct me Sir if I am wrong, as this is my surface level understanding of the Indian market condition.
Thanks
Sushma
As you addressed in above conversations Indian economy is fundamentally strong and is driven by domestic demand. I would like to add one more point to this, As I read in the newspaper in India only 2% to 3% of people invests in stock market but in USA nearly 70% so when there is a recession US economy will be affected more than Indian economy. What do you like to say about this sir
ReplyDeleteSushma & Rohit,
ReplyDeleteThank you very much for bring out lot of important issues. Let me make a quick comment: During 2010-11, 58.60% of turnover in NSE came from one city - Mumbai. Followed by Delhi (10.80%); Kolkatta (7.50%) and Ahmedabad (6.20%). So these four cities account for more than 80% (For details refer NSE Fact Book 2011). This answers the issues raised by both of you. So the Indian Equity market has a long way to go in terms of its geographic spread and retail participation.