The BSE Sensex’s move back to its previous high of 21,000 points could not have been timed more perfectly. Diwali and stocks make a perfect combination and headline writers had a great time playing on words such as fireworks and lights.
Regardless of what happens this week, a psychological breach has been filled by the index erasing the damage of the great crash of 2008. Or is it so? I am sorry to be the fly in the ointment, but I do think that investors should be paying more attention to what didn’t come back up rather than what did.
There are a number of stocks that haven’t made it back anywhere close to the highs they achieved in January 2008. For example, from the perspective of the Reliance Communications stock (the worst of the lot), the Sensex is still at about 4,800 points compared to January 2008. And for anyone still hanging on to their DLF stock, the Sensex is still at about 6,400. There are a number of other stocks that have done almost as badly, predictably mostly from the telecom and the real estate/infrastructure sectors. Interestingly, at the other end of the scale there are only a couple of Sensex stocks that have actually outstripped the index over this period.
The moral of the story is obvious — in any kind of market rally, there are always very questionable stories that get sold. It all looks fine as long as the going is good, but when the cycle reverses, many of the stocks and sectors that looked like great bets turn out to have been over-hyped. Some of these never come back. How long would it take for a stock like DLF to capture its previous high on an inflation-adjusted basis? A decade or two maybe? I wouldn’t be surprised if it never did so.
Today’s markets are characterised by a huge flood of liquidity from foreign investors, and even more importantly, the expectation that this flood of liquidity will continue. Investors would do well to remember that in stock markets, the foundation of future fortunes are laid when stock prices are down. When the bulls are raging, then more often than not, investors are laying the foundations of future losses. In today’s markets (as in January 2008), there are good stocks that are overpriced and there are bad stocks that are overpriced. There might even be some good stocks that are rightly-priced.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
