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The trick lies in timing the market
October 28, 2006
No analyst would ever have been punished for recommending an SKF Bearing to his clients in April 1992 (Harshad Mehta's era) or more recently Wipro in March 2000 ( Ketan Parekh's reign).
Both stocks, after numerous years of wait, are yet to reach the highs seen during those periods. In fact, the stocks have brought losses to the extent of 20 and 66 per cent respectively.
With the markets at an all-time high and the electronic media glamourising each move of the Sensex, it is easy to get carried away and buy stocks that are currently doing very well in terms of stock price appreciation.
I decided to revisit Harshad Mehta's 1992 peak, pick some stocks for myself and see how well off I would be today (after a 14-and-a-half-year gap), having bought stocks at their peaks.
Contrary to my belief that 14 years is a long enough time for stocks to deliver returns even if you buy the right stock at the wrong time, I found to my dismay that some of the well-known names that were known as blue-chips in 1992 (and today) have delivered pathetic returns.
Before I share my findings, let's understand the methodology of the study. For simplicity, dividends and rights issues have been ignored and only bonus and splits have been taken into account.
If I were to consider them, the returns would be favourably altered but would not have changed the inference. The quotes taken for 1992 are month highs and those for 2006 are the closing seen on 23rd October.
Of the 2,400-odd stocks that are quoted today on a daily basis, only 671 were quoted in April 1992. Now hold your breath. Of the 671 stocks under review, only 329, i.e. 49 per cent stocks have given positive returns.
The rest have returned losses ranging from 1 to 99 per cent. Only 33 per cent stocks were able to give better returns than 5 per cent saving bank accounts. If you think only the smaller, unknown companies would be among the losers, read Table 1 for some startling facts.
And if you thought that the rule applies only to the old economy companies, think again. Infosys, the current leader of the pack, was nursing its wounds as of late August 2006; it's up just 18 per cent in six years from its March 2000 peak. Satyam is languishing 41 per cent below its March 2000 peak.
Though the Sensex is higher than the Harshad Mehta (178 per cent) and Ketan Parekh (105 per cent) rally highs, the stocks that led those rallies are in the red. Even Lord Ram came back to Ayodhya after exile, but these stocks haven't!
Reverting to our SKF and Wipro example, had the reverse been done, that is, you bought Wipro in April 1992 and SKF in March 2000, you would be sitting on a mindboggling 30,000 per cent and 282 per cent returns respectively. The same stocks bought at the right time can give you phenomenal returns.Though stocks remain the preferred investment mode despite all the shortcomings, the moral of the story is that even if you buy the right stock at the wrong time, the wait for profits may turn out to be eternal.