July 24, 2005

Risk Reward ratio not in favor of investors at 7400 levels

Read this interview of chetan parikh (he runs the excellent website capitalideasonline ). He is an exceptional investor from the graham - buffett school of investing and among the few investors whose views i respect.

The complete interview is available in moneycontrol website


some snippets below

He says, "I would be comfortable with the levels being below 6000, because if the market goes below the 5500-6000 levels, there would be a lot more trading opportunities. But at this point of time in the market, it is difficult to find stocks with a large margin of safety."
He adds that, a good band of
trading for the market would be between 12-18 times earnings, and on that basis the Sensex should be anywhere between 5000-8400 levels.
Parikh says, "At the 7300 levels, the risk reward is not in favour of investors. This does not mean that the markets cannot go up, because on liquidity the markets can go even upto 8000 levels and past that. But from the risk management point of view, the odds are not in favour of the investors, from a one year perspective."

He says, "My sense is that the operating margins have peaked, and going forward, operating margins could come under pressure. A whole lot of companies have gone in for capital expenditure, and therefore the return on capital employed will come down. We are also seeing the bottom of the interest rate cycle, so there will be a pressure on margins, on return on net worth and capital employed, in the future.

i would completely with his analysis on the return on capital and other fundamentals. The BSE sensex stocks at an aggregate are returning 20 % + ROE (with the past no.s around 16-18 % at best ). So although the pe are not high , i would kind of wary of putting any more money. on the contrary i have started looking at reducing some of my holdings which seems to be get in the over valued territory.

1 comment:

Vidyanshu said...

Hi Rohit,

I am a patient and simple person. I am a beginner in these things and therefore I had entered the market with much trepidation. My stock picking was really simple - Identify Key Sectors/Very Good Stocks(past history or study of charts). See if they are at yearly lows(from the chart) and then Buy and Hold. I have not sold a single share I bought at 7500 levels...even though it went to 12700 levels, fell to to about 8800 levels and then went to 21000 levels finally languishing at 17000 levels.
I have been stupid and lucky. Now, I have a burden, I need to understand what I am doing and thus the endeavour to understand Value Investing...Thanks for all the tips on this site. It's really beneficial.