Mysterious are stock market?s ways
When markets fall, large firms fall a lot but they do fall a lot less than the small unknowns, writes Dhirendra Kumar.india Updated: Dec 10, 2006 21:53 IST
Sensex crosses 14K intra-day. Sensex touches 14K peak on strong fund support. Sensex hits 14K mark. Freak surge sends index beyond 14K. Sensex crosses 14,000 mark. Sensex kisses 14K. Sensex touches 14K mark. Crazy kiya re: Sensex kisses 14K. Sensex scales 14K peak, finally.
These were some of headlines that newspaper in the country carried on Wednesday, December 6. Yes, I know it’s strange that three out of ten (presumably) independently-written headlines thought of the word ‘kiss’, but that’s what happened. However, some big headlines and the usual collection of permanently breathless TV anchors apart, there was precious little excitement among real investors.
To us symbolism-seeking humans, Big Round Numbers (I hereby coin the abbreviation BRN) always seem to have a deeper meaning than they actually have. See how many people expressed shock recently when Chinese foreign currency reserves reached 1 trillion dollars. But investors aren’t really excited by the Sensex’ BRNs any more. They’ve seen far too many of them in far too short a time. They’ve got BRN fatigue. From 6,000 to 14,000, there have been nine first-time BRN events and nine is many too many to get excited about.
Also, even though the professional excitement peddlers studiously ignore the arithmetic, a thousand points of the Sensex isn’t what it used to be. When this bull-run began four years back, the journey from 3,000 to 4,000 meant a gain of 33.3 per cent. From 13,000 to 14,000, the gain is just 7.7 per cent. Investors are now so used to big gains that 7.7 per cent just doesn’t hold any excitement. I think the next BRN that anyone should seriously get excited about is 20,000 but whether that will come about in one year or 10, I have no idea.
I’m serious. I didn’t put that 10-year range in that last paragraph just to frighten you. Ten years to reach 20,000 is just as possible as one year. Equity markets are like that. There’s nothing you can do about it. Last week, I’d pointed out that there was a lot of fear in markets and many of the best fund managers had configured their portfolios defensively. Conventionally, this means loading up with large companies which are assumed to be more stable in a falling market.
In the Indian markets, this is true only on a relative basis. When the markets fall, large companies fall a lot but they do fall a lot less than the small unknowns that have been punted up on the strength of tips circulated by speculators. The difference is that eventually the big scrips rebound but the purely speculative ones don’t, having served the basic purpose of transferring wealth from the impatient to the clever.
I think the real action lies in being able to identify the next lot of companies that will one day join the ranks of the big blue chips. Everyone knows that the big stocks are safer and everyone knows that smaller stocks are risky. But there are many medium-sized companies are knocking on the doors of blue chip status. A very large number of them are being pitched as potential blue chips. When the going gets a little less easy, only a small number of them will be recognised as having made the mark.
Those who manage to call these correctly, will probably stand to make some serious gains. Even if they just make some lucky guesses.
(The writer is CEO, Value Research India Pvt Ltd)