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The lack of irrational exuberance


The stock markets are at their all time high – but is it time to sell now? Everyone’s talking about a correction around the corner. That FIIs will sell out. That interest rates are rising to huge levels. That inflation is now over 6%! That all these factors will lead to a slow down in India and the “fundamentals” are going to be hit big time. What do I think?

Actually high inflation means strong growth. Interest rates are control measures. We are complaining about 9% interest now? It was more than 9% in 2002, when the bull market started…and slowly came down over a few years. This year, interest rates will stay at this level or a little bit higher, but the US Fed will drop rates by around 100 basis points in 2007,and we will follow suit in 2008. So the lower interest rate regime will return next year.

One big issue is whether liquidity will remain. But man, that is such a moot issue today: MFs are getting more and more money every single month and the data in the markets is showing very strong money flows into equity. Remember SLR and Repo/Reverse Repo largely suck out debt liquidity which actually moves money into equities. In simple terms it means that more and more people are investing in Indian stocks, either directly or through Mutual funds.

Lastly, behavioural patterns. Short term movements have always reflected investor sentiment, and today there is only pessimism and skepticism in the streets. Ask anyone what will happen to the Sensex, everyone says it will crash. The problem is, if that is the feeling, then it will not crash. For a real bust, there needs to be exuberance, irrational exuberance. The kind that we saw in May 2006.

Irrational exuberance is where everyone around you is talking about the stock markets. Dinner conversation hovers around how someone made 5% on a daily basis, just buying a stock in the morning and selling it in the evening. Everyone’s talking about the next level – that it will reach crazy, insane highs and no one can ever stop this juggernaut, and that anyone thinking otherwise must be nuts.

Right now that is not the case.

What I see and hear around me is: Fear. No one wants to invest at what seems to be the height of the markets – after all, no one forgets a May 2006 too fast. Yet, unless people get irrational, markets don’t crash on their own – it takes overleveraged traders and greedy investors to topple a market. These guys are still not in the market right now – at least, I haven’t seen too much of them.

Other than exuberance, external factors can influence a major fall. Like BJP losing elections in 2004. Or a regulatory scam where they stop markets. Or a war. You can’t predict that anyway, and by the time you can, it’s too late.

So let’s focus on the issue: No irrational exuberance yet. Everyone’s a skeptic. Everyone’s a muh-bola-bear. This is the time for smart investors to buy, and buy into the right shares. In fact, there will be small, healthy corrections every few days – choose that time to buy.

What’s the right share? Well, I bought BHEL at 2120 on Jan 15; simply believing that a strong order book deserves a better valuation. It’s up at 2448 today, and has announced STELLAR results post market time, and a 1:1 bonus, so I assume it’s going to up itself on Monday. That’s already a 15% return in 15 days, and most likely I will sell if the share moves beyond 2800 within three months.

Now, BHEL was a smart move. But I’ve made a seemingly dumb move too – I bought Dr. Reddy’s Lab (DRL) at Rs. 790 a couple days back. It’s at 762 or so now, a 4% loss! But I still like that share – I think it’s being offered at a ridiculously low valuation, so I’m holding till about 1000 or more.

What’s my point? That there are some good stocks out there that are worth buying. Especially in the face of the recent stellar results everyone has announced. Heck, even Reliance is an amazing buy at these prices (remember, it has a sub 20 P/E, and has consistently grown at more than 25% in the last three years).

And in the same vein, there are bad stocks. There are stocks like GMR Infrastructure which are still being given an 100 P/E or so after their last results. This is crazy. I will hold my opinion on Naukri (Info Edge) until their results are out, but even they have a ridiculously high valuation. All real estate stocks are at insane levels. Don’t buy such companies.

But do not believe the skeptics right away. The sun has not set on the bull market. Not in this year. I have bought an exchange traded fund, the NiftyBEES, which tracks the Nifty- I believe that within three years, I will see a return of 50%. Individual stocks of course, are bigger growth stories than that; I’m buying my picks.


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