Tuesday, August 3, 2010

Where is the Sensex headed? – a candid view from a stockbroker

Last Sunday, I met a stock broker friend having a quiet beer after his round of golf. He is the owner of an old stock broking firm founded by his grandfather, and is well-educated and knowledgeable. After initial chit-chat, I just had to ask the questions: Where is the Sensex headed? What should investors do?

A gist of our discussion is given below:-

  • The Sensex should hit about 18600 in the near term and 20000 by year end
  • Every one and his brother-in-law is expecting a correction; that is why the correction isn’t happening!
  • Such a long sideways consolidation is not unusual; from 1994 to 1998, the Sensex had traded in a zone between 2700 and 4600
  • Investors have short memories and many have forgotten those 5 years; such short memories help us brokers to make money
  • We love the business TV channels because they keep up a bullish prattle that generates more business for us
  • Investors are becoming smarter day by day; thanks to the Internet and the business channels they are better informed and less easily fooled
  • As brokers, we should be spending more time on investor education – but who has the time?
  • We haven’t been able to expand into other locations in India because of lack of funds and inadequate bandwidth to provide good service to investors
  • The publicly listed and large brokerages with pan-India operations mostly provide dubious advice and take investors for a ride – pushing them into investment avenues that help the brokerage and not the investor
  • Perhaps the only exception to the above general statement is the Kotak Mahindra group – Uday Kotak’s brains and Anand Mahindra’s money and integrity is a rare combination which is more an exception than the rule in the broking community
  • It is important for small investors to build a portfolio of fundamentally strong stocks and then stick to that portfolio; flitting from one good stock idea to another may be exciting, but it only makes us brokers rich
  • Bull markets require a nice scam to shoot up to new highs; there was the Haridas Mundhra scam in the good old days – then the Harshad Mehta scam in 1992, the Ketan Parekh scam in 2000, and the ‘benaami’ IPO and Satyam scams in 2008
  • Stock market regulations have been tightened and SEBI is doing a good job, but the scamsters always find a way to create a ‘bubble’ and loot money from unwary investors

Looks like investors may have to wait a while before another run-away bull market takes shape. If the 8 year cycle holds, then the next scam (and bull market top) may happen only in 2016.

We have already seen 11 months of sideways consolidation – and horror of horrors, this consolidation may continue for another 3 to 4 years! That will surely test the patience and mettle of die-hard stock investors.

Q1 results declared so far show that sales are increasing but growth in profits has slowed down. High costs of raw materials is the main culprit. With fixed deposit rates on the rise, this is a good time to take a look at your asset allocation plan and book partial profits to protect your stock market gains.

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Eswar Santhosh said...

It's not necessarily a very bad thing.

It's the Sensex that is stuck in a range in the last 11 months. Select stocks (luckily a handful from my portfolio) have been scaling new highs. If this range bound market is to continue for years, I'll be happy.

First reason - I can stay out of the market and do other things in life, not necessarily get glued to every day gyrations of the Sensex.

Secondly, since the run-up is going to be stock specific, it would be a great challenge for somebody like me to learn and apply real stock selection - not something based on hype / flavour of the day / tips / rising tide lifting my stocks etc., I'm not sure I can do that. But, if I do find at least one winner, then it'll be a good experience to boost / tune stock selection skills.

Thirdly, I like less crowds. People in general tend to focus more on Sensex levels (I'd be lying if I said I don't ever get fascinated with Sensex levels), get bored and leave. That actually leaves a few good stocks ripe for accumulation without paying too much for their growth and also provides time for slowly adding them.

Subhankar said...

Now, that's a long-term investor talking.

While watching one's stocks grow without unnecessary intervention is an excellent strategy, you only make money when you actually sell.

Selecting good stocks, particularly when the market has already run up, is always a challenge. One needs to stick to the basics of Margin of Safety, Circle of Competence, positive operating cash flows, low debt/equity ratio, strong RoE. Eventually, the market will understand and appreciate the stock.

Team Leader said...

having been an active participant in the markets since 1982, I am a little surprised by the comments made by the knowledgeable broker :.

1.Infact everyone ,including their brother in law is expecting sensex to hit new highs in the next few months and not the other way around . doubt it ?? ,then,check out all the biz channels and see whether any analyst is expecting even a 10 % correction. The most bearish of them , are expecting 5200 or 5300 to be supports on the nifty, which translates to a correction of less than 5 % !!!!.

2.The Satyam prob came not in 2008 when the market peaked out, but in January 2009, when the sensex was nearing its bottom !!!!.

The markets have NEVER peaked out on scams.

The peak in 2008 was hit on all round euphoria.The peak in 2004 was also hit on the BJP shining india campaign euphoria. the 2000 peak was again hit on euphoria . the KP scam was unearthed in March 2001, ONE YEAR after the peak. Even in 1992, the HM scam happened in lated April , while the market actually peaked out in early April. that was the closest from a peak to the scam being uncovered.

3.how can you call the range of 2700 -4600 which translates into 1900 points or 70 % be considered sideways ??? .

4 the way the investors are still chasing penny stocks even now doesnt give me the feeling that they have become any smarter !!.

5.the investors who were in the 1994 -1998 were a different generation of investors. every bull market brings in a new generation of investors/speculators/traders . and we have had 3 major bull runs ( 1999-2000 and 2003/2008 and 2009- ? ) since then .

SV said...

@TeamLeader, Strong counter argument..but that was just a discussion with the stockbroker :)

Subhankar said...

@Team Leader: Thanks for your detailed comments.

To give the devil his due, the stockbroker's first comment was that the Sensex should hit a new high.

While talking-heads in business channels try to 'talk-up' the index, the HNI clients of the broker have been regularly booking profits and sitting on the cash for redeploying only after a correction. Volumes are usually much higher on the buy side than on the sell side during bull periods. The broker mentioned that business was bad enough that he was thinking about setting up a legal services division to survive!

The Sensex hit recent bull market tops because of the excess liquidity created by the scams. The scams were detected much later - after the scamsters sold out and made huge profits.

The 2700-4600 range continued for 5 years - neither moving below nor going above the range. The range may be higher in percentage terms, but was much smaller in absolute terms than the current range.

It is a fact that every bull period brings forth a new set of inexperienced small investors who try to get rich quick, and become smarter after they lose a lot of money. With every passing bull/bear cycle, the number of such smarter investors increases.

Investors today are basically no different from those in 1994-98. They have a lot more information at their fingertips, but suffer from the same emotions of greed and fear that cloud their decision making.

@SV: Appreciate your comment. You are correct in assuming that the discussion with the stockbroker doesn't mean that I agree with everything he said.

His 'bull markets need a good scam' comment was startling and I had vigorously debated it. But later realised that he may have said it in desperation - hoping that a scam will lift the Sensex out of its range, and boost his business.

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Subhankar said...

Thanks for your comments.