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Tuesday, April 04, 2006

If Sensex is going to fall then should we avoid stocks?

Since we have claimed that Sensex is over-priced, should the investor avoid stocks and equity investments altogether? Does this appy to mutual fund investments and unit-linked insurance plans (ULIPs) too?

We are not advocating a complete avoidance of stocks and we will rarely advise that. What we are suggesting is that tread with caution. Learn more about the companies that seem exciting. Of course, the exciting companies or glamor stocks are usually very good and fast-growth companies. But are they worth investing in?

Now that might seem like a strange question. If the growth stocks are very good companies then where is the question of "are they worth investng in?"? Well as it applies to anything that you buy, the question applies to buying companies or their stocks too. Is it worth buying? Or has the marke already priced it such that even if they remain as high growth as they promise to they might still not make any returns for the investor?

When markets are emphatically bullish about certain growth stocks their price sometimes has already factored in all future growth potential. If that is the case, then the only way for the stock to go is down even though the company might do extremely well.

So our advice is that try to do a fundamental analysis of the stock and try to understand if the market is already overpricing it way beyond its value. If that is the case, then please refrain from investing in it. Unless, of course, you are a momentum investor or technical trader or know exactly what you are doing and why...

Since we don't subscribe to greater fool theory we can only ask you to compare price and value.

1 Comments:

Anonymous A said...

Hi Links...
Read all your posts.
Fascinated by the crorepati funda. However, up 1,00,00 can be invested as per sec 80C. But what abt the interests? are they not taxed? I mean whwt when 1,00,000 later becomes 1,10,000 and lil more n more each year till we hit the 1 crore target?

Anu

Thu Apr 06, 01:49:00 PM  

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