Vijay Kumar Gaba

 As per an old maxim, “beauty is in the eyes of the beholder”. This essentially implies that beauty or attractiveness of something (or someone) is mostly subjective. It is entirely possible that someone finds something beautiful, while at the same time someone else considers this thing to be ugly.

This maxim applies, mutatis mutandis, to equity investing also. A stock is found attractively values and prohibitively expensive by different market participants (analysts, fund managers, and investors) at the same time and price point; even though all of them may have access to the same set of data and information about the underlying company. The stock of ITC is a classic example of this dichotomy in the present day context. The stock is believed to be a top wealth creator and wealth destroyer at the same time by the different set of people.

I am sure no one would have any problem with this divergence in views about the future prospects of various businesses and companies. In fact this divergence in the views is what keeps the markets moving. Imagine a situation where there is no divergence in views about the future prospects and fair present value of the prospective earnings and growth of any company. There will be no trade in such stock as there would only be buyers or seller for that. The very purpose of stock markets will be defeated in that case. The more the divergence in views about companies and businesses, the better it is for the markets and market participants.

The real problem occurs when the market participants start looking at stocks from the eyes of “others” and begin to practice the greater fool theory. They start buying stocks of companies in which they have little conviction, believing that someone else will find “value” in this stock at a price higher than what have paid for it.

In past one month, I have observed numerous instances where brokerages and “market influencers” on social media are seen marketing stocks of bankrupt or loss making companies. Some brokerages have written sensational reports about “deep value” in public sector companies, which lay completely neglected three months selling at one half or one third the current market price (CMP).

Numerous equity analysts, fund managers and traders have written or spoken about the value in mid and small cap category stocks, suggesting how the current rally in this category of stocks may continue for next 2-3 years. Many these reports and interviews are totally silent on the fact that in almost all market and business cycles, a mostly different set of stocks perform well, and losers of previous cycles hardly perform well in subsequent market and business cycles.

I find the following, particularly relevant to highlight the point I am trying to make here:

I have no issues with these views or the people expressing these views. I just do not concur with these views. Given the current high momentum in the markets, I have two options either flow with the current to stay on the side lines and wait for the waters to calm. I am opting for the second alternative. My experience of past 30years guides me that I may not have to regret this decision 6 months later.