A Stock Market Fable
In
fact, in 2007, just before the market's peak, I wrote a newspaper
column with this amusing story: One day, a man appeared in a village and
offered to buy all the monkeys that the villagers could supply for Rs
1,000 each. The villagers caught all the monkeys around and sold them.
Soon, another man appeared and offered Rs 2,000 for each monkey. However,
there weren't any more monkeys around so that the villagers couldn't
sell the man anything. However, they figured that, for some reason, the
demand for monkeys was going up, so they looked for the first man and
bought back all the monkeys for Rs 3,000 each (which was the least the
man was willing to take). Unfortunately, this stratagem failed, and the
buyer never reappeared, leaving the villagers stuck with the animals.
Nearby,
there was another village where the same story was repeated, except it
was about goats. The final buyer also never appeared, and the villagers
were stuck with the goats. However, there was a big difference. The
monkeys were a nuisance. They were noisy, troublesome, and dangerous,
and they stole food all the time, so the villagers eventually abandoned
them in the forest. The goats, however, were alright. They were easy to
keep, grazed on grass and gave milk. When they grew older, the villagers
slaughtered them for meat. All in all, buying goats was not the bad
deal it looked like initially.
For
investors in today’s raging bull market, the moral of the story should
be obvious. In this heated market, take great care to differentiate
between the 'monkeys' and the 'goats' in your portfolio. The 'monkeys'
are the speculative stocks, hyped up by market sentiment but lacking
fundamental value. When the market inevitably corrects, these stocks may
prove to be not just worthless but actively detrimental to your
financial health. The 'goats', on the other hand, represent companies
with solid fundamentals, strong business models, and the ability to
generate real value over time.
The goats are expensive, too, but at least they will deliver value even after buyers disappear
Do you remember the atmosphere in the equity markets towards the end of
2007? The Sensex had been up about five times over the previous five
years, and really, there was a madness in the air. There seemed to be no
end to how high and how fast stocks could rise. We all remember how it
ended, but that’s not my point today. My point is not what happened to
the markets when they crashed but to individual companies when they
recovered.
Whenever
the markets rise like they did then, they eventually crash. It was
inevitable then, and it’s inevitable now. There may be some doubt about
when it will happen and by how much, but it will definitely happen. To a
seasoned equity investor, this is nothing unexpected. Ups and downs are
part of the game.
The
part that few investors appreciate is that these are dangerous times.
Over the next few years, when the dust settles in the next market cycle,
you will find that these weren’t great times as far as buying stocks
was concerned. You might think I’m saying this only because during bull
runs, valuations are high, and stocks are expensive. You would be right,
but that’s not the only reason and the biggest one. The biggest reason
is psychological. When anything you buy makes money, the constant
skepticism that investors need disappears from their brains.
This
euphoria can lead to poor decision-making, where investors ignore
fundamental analysis and chase momentum. They may overlook company
financial or governance red flags, blinded by the allure of quick gains.
Moreover, even mediocre companies can see their stock prices soar
during these times, creating a false sense of security. It's crucial to
remember that when the tide eventually turns, the quality of the
underlying business will determine which stocks survive and thrive, not
just market sentiment
Credit Dhirendra Kumar
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