Showing posts with label bubble companies. Show all posts
Showing posts with label bubble companies. Show all posts

Friday 19 October 2018

Definition of a Stock Bubble

Definition of a stock bubble


A bubble occurs in a stock when:

1.  Implausible assumptions are applied to justify its present price using normal valuation (e.g.  DCF) models.

2.  There are people buying at these prices ignoring these implausible assumptions.


Based on this defintition, Tesla is a bubble while Apple and Microsoft are not at current prices.  

Tuesday 16 November 2010

Be wary of runaway stocks in a bull run

15 NOV, 2010, 12.00PM IST, DHIRENDRA KUMAR,
Be wary of runaway stocks in a bull run

The Bombay Stock Exchange (BSE) Sensitive Index (Sensex) revisiting the previous high of 20873 points could not have had a better timing, with Diwali and stocks making a perfect combination.

However, notwithstanding the festive connection, the index filled a psychological breach by erasing the damage of the great crash of 2008. Or maybe not.

I’m sorry to be the fly in the ointment, but I do think that investors should be paying more attention to what didn’t come back up rather than what did.

There are a number of stocks that haven’t made it back anywhere close to the highs that they touched in January 2008. For instance, for Reliance Communications (the worst of the lot), the Sensex is still at around 4800 points compared to January 2008.

And for anyone still hanging on to their DLF stocks, the Sensex is still at around 6400. There are a number of other stocks that have done almost as badly. Predictably, these are mostly from the telecom and the real estate/infrastructure industries.

Interestingly, at the other end of the scale, there are only a couple of Sensex stocks that have actually outstripped the index over this period.

The moral of the story is obvious: In any kind of market rally, there are always some questionable stories that get sold. It all looks fine as long as the going is good, but when the cycle reverses, many of the stocks and sectors, which looked like great bets, turn out to have been over-hyped. Some of these never come back. How long will it take for a stock like DLF to capture its previous high on an inflation-adjusted basis? A decade, maybe two decades? I wouldn’t be surprised if it never did so.

Today’s markets are characterised by a huge flood of liquidity from foreign investors and, even more importantly, the expectation that this flood of liquidity will continue. Investors will do well to remember that in the stock market, the foundation of future fortunes are laid when stock prices are down. When the bulls are raging, then more often than not, investors are laying the foundations of future losses.

In today’s market (as in January 2008), there are good stocks that are overpriced and there are bad stocks that are overpriced. There may even be some good stocks that are rightly-priced. Good luck finding them.

(The expert is CEO, Value Research)

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/Be-wary-of-runaway-stocks-in-a-bull-run/articleshow/6927176.cms

Thursday 21 October 2010

Weeding out over-heated stocks

Avoiding over-priced stocks that could plunge anytime is as critical as picking the right stocks. 

Buying over-heated stocks and losing money in a bubble burst is not an uncommon phenomenon in the markets.

Stocks that have moved up the ladder very quickly are potentially risky. The sudden spurt could be based on a rumour or event not backed by strong fundamentals. 

Good market conditions or bull runs do not last forever. Investors, who believe that good times are here to stay often burn their fingers. 

On a similar note, an over-valued stock has little scope or space for upward movement and could lose its momentum anytime.  

A little bit of research and analysis will help investors make prudent investment choices even in bear market conditions.


http://economictimes.indiatimes.com/features/financial-times/Investment-tips-Pick-the-right-stock-at-right-time-for-returns/articleshow/6759442.cms

Saturday 1 May 2010

Buffett (2000): IPOs usually result in transfer of wealth and that too on a massive scale from the ignorant shareholders to greedy promoters.


In Warren Buffett's letter for the year 2000, he talked about how investors, in their irrational exuberance, tend to gravitate more and more towards speculation rather than investment. Let us go further down the same letter and see what other investment wisdom he has to offer.

IPO – It’s Probably Overpriced

If it is out there in the corporate world, it has to be in the master's annual letters. Over the years, Mr. Buffett has done an excellent job of giving his own unique perspective of the happenings in the business world. Whatever be the flavour of the season, you can rest assured that it will be covered in the master's letters. Since the letter for the year 2000 was preceded by the famous 'dotcom bubble' and the flurry of IPOs associated with it, the master has spent a fair deal of time in trying to give his opinion on the same. And as with other gems from his larder of wisdom, strict adherence here too could do investors a world of good.

On IPOs, the master goes on to say that while he has no issues with the ones that create wealth for shareholders, unfortunately that was not the case with quite a few of them that hit the markets during the dotcom boom. Unlike trading in the stock markets, IPOs usually result in transfer of wealth and that too on a massive scale from the ignorant shareholders to greedy promoters. The master feels so because taking advantage of the good sentiments prevailing in the markets, a lot of owners put their company on the blocks not only at expensive valuations that leave little upside for shareholders but most of these companies end up destroying shareholder wealth.

Hence, while investing in IPOs, two things need to be closely tracked. 
  • One, the issue is not priced at exorbitant valuation and 
  • second, the company under consideration does have a good track record of creating shareholder wealth over a sustained period of time. 
Thus, if an IPO is only trying to sell you promises and nothing else, chances are that you are playing a small role in making the promoter, Mr. Money Bags.

Master's golden words

Let us hear in the master's own words his take on the issue. He says, "We readily acknowledge that there has been a huge amount of true value created in the past decade by new or young businesses, and that there is much more to come. But value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get."

He further adds, "What actually occurs in these cases is wealth transfer, often on a massive scale. By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates). The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them. Too often, an IPO, not profits, was the primary goal of a company's promoters. At bottom, the ‘business model’ for these companies has been the old-fashioned chain letter, for which many fee-hungry investment bankers acted as eager postmen."

To conclude, the master says, "But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: 
  • First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. 
  • Second, speculation is most dangerous when it looks easiest."