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Quality at unrealistic prices

There are plenty of great companies and great stocks to invest in--but practically none at anything close to great prices

The recent gyrations of the stock markets have thoroughly confused investors. The sheer variety of reasons that are being trotted out by the usual suspects means that one can take one's pick depending on the mood and the time of the day. However, those who are carefully focussed on the state of individual companies, vis-a-vis their businesses and their stocks can find some good reasons to be worried about.

Many investment managers have concluded with deep regret that there are two kinds of stocks in the market today--those that are bad investments because the underlying business is shaky; and those that are bad investments where the stocks are overpriced. This is true even after the sharp fall in the markets.

What has happened is that 2008 and its aftermath has made investors extremely unwary of poor quality businesses. In the years since, the debt-heavy, earnings-impaired or otherwise compromised businesses have seen a near total exit of discretionary investors. At the same time, the increasing inflow of investments into equity has meant relatively higher flows into the set of stocks identified as high quality. With real, on the ground turnaround still being weak, the result is a large set of stocks which have valuations that are several times higher than is justifiable. Unless these companies can register several years of huge growth in profits, their prices are not justifiable.

This has complicated implications--for investors as well as investment managers. If an investor wants to have any kind of focus on buying stocks at good value then they have nothing much to do in today's stock markets. One way or another, a lot must happen before the equity markets become an inviting--or even an easy--place to invest in.