Friday, April 9, 2010

I was off by 70%

In the post in May 2009, I felt vindicated on my call of Nifty touching 3800 and Sensex touching 12000. But whatever next I predicted, i.e. Nifty touching 3150 and Sensex touching 10500, I was off by around 70% since 1.7*3150=5355 and 1.7*10500=17850. What can be the reason? There are many:
  • Indian economy is doing better than expected and corporate results too are better than predicted.
  • There was a lot of pent up demand in Indian economy which can easily be seen in Auto numbers.
  • I was thinking of a lot of increase in interest rates (around 250 bps or 2.5%) in a short period of time due to high inflation. This has not materialized due to enough liquidity in the system and reluctance of RBI from raising interest rates. RBI has refrained from raising rates due to various reasons, one of them being the threat of heavy capital inflow in Indian debt if the interest rate differential from developed nation becomes very high.
Enough bashing of myself. Contrarian indicators have started to become visible.

  • India infoline is suggesting 23 BUYs out of the total 27 recommendations in the last two months. There is only one SELL, India Cements and the rest of them are MP (i.e. Market Performer, the stock should perform as good as Sensex). If statistics are correct then generally if there are 27 recommendations, 9 will be BUY, 9 will be SELL and 9 will be Market Performer. Two of the companies, Aban offshore and Welspun Gujarat Stahl Rohren is recommended twice. This clearly shows that the analyst are becoming biased towards bullishness. See the images above. Most of the recent recommendations have upside less than 20%, while value investors will not enter a stock if the margin of safety is less than 30%, i.e. upside of at least 40%. If you do not understand the previous statement, read it again.
  • Inflation rate and its forecast are inching up. Provisional Cost Inflation index for the year 2009-10 has been declared at 632, which is 8.6% higher than 582 of the year 2008-09. The fixed deposit rates of 1 year after tax for the highest tax bracket today is less than 5%. How will people cope with the rising cost of living with their savings?
  • Total market capitalization of all the BSE companies stands at 63 lakh Crore as of today. This is higher than 61 lakh Crore of GDP that Indian economy reported in year 2009-10. But still RD is saying there is no bubble in indian equities. Some of the frontline companies like Nestle, Asian Paints and Hero Honda are trading at more than 60 times last 10 years average earnings. The same kind of valuations were observed when the Sensex reached 21K in January 2008, the only difference was the companies. In January 2008, it was Larsen, Reliance, BHEL, BHARTI and HDFC. This doesn't mean these companies are not good or cannot go up. The only point I am making is there is no margin of safety. There are only two time periods when Total Market Capitalization of american equities went beyond its GDP, 2000 and 2007 and both of them were identified as bubble, one IT bubble and the other housing bubble.
Long term wealth cannot be created when you are part of a bubble. Look at the Dow chart of last 10 years and you will see why. Best of luck!!!!
Many shall be restored that now are fallen
and many shall fall that now are in honor -HORACE--Ars Poetica
Bookmark and Share


Mahesh said...

Very smart analysis.

Thanks a ton :)

Saif said...

your posts are as always very thoughtful chinmay...keep up the good work...looking fwd to many more posts..

Vishleshak said...

to think out of 27 stocks from a brokerage firm 9 should be buy 9 sell is not correct statistically. There is a sampling bias here. This distribution may be correct if they had some recommendation for all the stocks. But since these firms only recommend on the stocks which are part of their portfolio there are generally very few sell recommendations. After one sell recommendation that stock is not available for further for reco. Why after hold or buy you can have any reco. So in general you see very few sell recos. I am not refuting your analysis of overvaluation in the market but you can not use such statistics. Any way I like your blog and have a rss feed. Good job.

Related Posts with Thumbnails