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Nifty, Sensex and Bubbly?


Mark has responded. (History: He posted about the BSE Stock Bubble, I responded, he said something was wrong, and then I attempted a clarification.)

Mark makes an interesting set of points:
1) FIIs making up a steady 25% of a growing total market means that in absolute terms FIIs own a lot more of Indian stock today. And pulling foreign investment out means a serious drop because 25% of the volume will not be there. Good point, and as I’ve noted, there will be serious drop if the FIIs completely exit. I just don’t think they will, for a) they don’t like to lose money and b) hot money is a small part of total FII investment but I agree that Mark is partly right here.

2) Mark attributes the American bubble to the advent of online trading. I attribute the Indian stock market rise to the advent of online trading here. Oh, you think, there’s so few people using the Internet in India, what is Deepak talking about? But the money is in intermediaries – sub-brokers who’ve set up terminals using a phone line and a computer in smaller towns, and offered investment capabilities to the big guys in small towns (who can be quite rich, and just lack avenues to deploy money).

There’s still money chasing the markets. Online trading is still nowhere near its limits and is still spreading, and mutual funds are getting gazillions of rupees thrown at them even now. So money flow is still there and at every dip, there are sub-brokers whispering to the ever-hungry investor, “This is the time to buy”. Momentum still exists.

So is it a “bubble”, like America’s was? Sectorally, we’re off the scale – the U.S. bubble was all about I.T. and midcaps, and our upmove has been well spread across the Industry. But that still doesn’t mean it’s NOT a bubble. Let’s look deeply – there are stocks at 30+ PE, like ITC, Infosys, TCS etc. They’re growing at 30+%, I agree – but they’re just too hot to chase. These involve a bubble – expecting consistent 30% growth rates on already humongous profits is fairly stupid; there has GOT to be a stability period somewhere.

But there are stocks that are at far lower P/Es, and that are growing as much. My recommendation, Balaji Telefilms has grown over 25% last year, and looking at TV viewership increases, soap addiction and new forays, the company looks set to keep at it for the next two years. It has a forward P/E of 12, which I think it will retain, so at the very least your money will go up 25% (at the same P/E, in a year). That’s a decent return, and worth the investment. (As I say it, the stocks up to 136 today)

There may be little to gain in the overvalued stocks (PE of 30+), but there’s a lot of value in the market that seems untapped. Still, the fact is that many of these 30+ PE stocks make the Sensex, and if they fall, so will the Sensex. Mark’s words will perhaps ring true, yet I find myself screaming that I was right as well.

The bubble does exist in the Sensex perhaps, but there’s still value buys available. America’s quite that way too – there have been great value buys in the last 5 years, though the DOW index has remained as flat as a carrom board. Going forward, the concept of “stock market bubble” will be determined only by whether bubble stocks outnumber the value buys.

One place I agree with Mark is:

Fundamental analysts are always able to fundamentally justify any price for any stock that they so choose because the rules and measurements are mostly arbitrary, pseudoscientific, and open-ended because you can never prove or disprove the growth assumption that’s used in calculating a current value nor how far out someone should be willing to pay in advance for growth.

Mark is right: People claim any price is good for a “darn good stock”. So what’s the right price? In the Indian context (I know no other) here’s the Shenoy Investment Funda:

Buy a stock valued at less than 14 P/E, with past 1 year profit growth of 25% or more, and future 2 year visible profit growth of 25% (annualised). Sell when you make 50% profit (annualised), or 25% in less than 90 days (to cover momentum madness). Book losses at any 20% dip in price, with a minimum 90 day span.

Lots of my favourite stocks come in there, but sadly many Sensex stocks do not qualify. These have a growth potential but those are largely momentum plays – my concept of value doesn’t get affected too much with short-term sentiment.

On the whole, remember:
1) Don’t ignore momentum. The market’s ruled by retailers and sentiment+rumours can cause stock prices to sizzle unnecessarily. Sell partially or hold when you think the market getting too hot to handle.
2) Buy value, not indices: The index is just an arbitrary indication; the value is all in individual stocks. Index plays are inefficient because they’re easily manipulated and have no real underlying value – all of it is derived from individual companies. So buy the companies instead, and don’t really bet on the Sensex or Nifty going up. But keep an eye on the indices; if they fall drastically, momemtum is working against you; go back to point 1.
3) Buy for the long term, sell for the short term: Purchase a stock for longer term gains – between 1 to 5 years. If you see severe gains in a shorter term – sell part of your holding. Sell when you foresee a short term dip, or when you’ve made 20% losses. Sell when you think you can buy back at a lower price.
4) Don’t ignore fundamentals, test your logic: Higher interest rates = higher EMIs on Car Loans + Higher petrol prices = lower car sales = lower growth for passenger cars = bad for LCV stocks. Fundamentals are always logical, but test your logic: If salaries are up 25%, a 10% increase in EMI payments plus a 10% increase in petrol costs does little to stop car sales growth. Also, owning a car is still considered prestigious in the country. (But salaries are NOT up 25%, just for the record). Logic testing against actual data is essential.

Bubbles will come and go. You’ll always have money making opportunities in the market.


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