April 11, 2006

A good idea carried too far

1991-1992: Harshad mehta boom
Story: Liberalisation

1994 – IPO boom

1999-2000: IT stock boom

2003 - ? : The india story .

‘India will grow at above average rates ( > 6 %) for the next few years and more. India has the requisite demographics, savings rate and the right condition for growth’

The underlying idea behind each boom was true and maybe sound. But typically the idea got carried too far. I am reminded of this quote from benjamin graham (paraphrased)

‘ It is not the bad idea which does you in, it is the good idea carried too far’

So you have a boom in the stock market, the commodities market, gold market, real estate market. Read somewhere that property in mumbai is more expensive than manhattan !!

Maybe it is ‘different’ this time …who knows ?

I am reminded of the following statement from warren buffett

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large dosesof effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

-- warren buffett , letter to shareholders 2000

So maybe there are people who are smart to know when the market will turn. I don’t think I can do that. Better to hold back or if the froth in the market increases, start selling.

another indicator of the bull market - in any party or evening out with friends and family, i keep hearing of the fantastic real estate, IPO or stock tips which should not be missed. prefer to keep my mouth shut in such groups. Who wants to listen to a party pooper ! surprising bit is that no one talked about stocks in 2002-2003 .


Bombayite said...

Would you advise investors to book profits and exit the markets at these levels.

Rohit said...

Hi satish

diffcult to make a sweeping statement for others. i can at best speak for myself. I am definitely not buying and looking at selling securities which i think are overvalued.

ofcourse if you hold securities which you think are undervalued, then the general market levels should not influence your decision

ValueArchitects said...

I dont contest the doubts which u have raised. Nor would I disagree from the fact that the economy is going great guns from most of the directions, coupled and propelled with favourable conditions created by govt/managers to make things better around us in India. The spendings from the young population, propelling growth, is very real and visible across the country.

Overall the markets have become expensive, thanks to the party-popping firangis who are flowing into the country with handbags filled with millions, to be deployed "immediately", and the momentum-players promising to do so "immediately".

But if you are willing to take cognizance, its only the top few 100s or 500 companies which have gone too far. The small/mid cap are still low hanging (thou thats not a recommendation to go on a confident buying spree). If the mkt crashes, the entire set will go down.

Hence it makes a prudent sense to dislodge from the highest priced scrips in the portfolio, and hang on to the others. I guess special situations, and sitatuation where there is strong earning visibility for next 3-4 years can be retained. Overall, I "feel" that things should not go ugly for a value investor on the whole.