About comparison with Moody’s. If we have to do it, we should do it properly. Not just by looking at the beautiful long-term stock price chart.
The US markets are the most bonded markets in the world. That’s not the case here. And interest rates there are a fraction of the interest rates here. Those are just two reasons why I am reluctant to compare apples with oranges. There are others (for example sample size of 1 data point!).
But some people have been pointing to the Moody’s chart. So, if you have to do it, you should do it properly by asking two questions:
-
What happened to the earnings when the scandals broke?
-
And what happened to the stock price?
First, the earnings. See how they fell off a cliff.
It took Moody’s 7 long years to get back to the earnings level it delivered in 2006. As I wrote earlier, it takes a long long time for earnings to get back. And when I write this, I am not just referring to one data point about what happened to rating companies in the US. Rather, I am referring to what happens to companies and their earnings when there are serious accusations about some moral issues relating to their business practices.
In India, the pain in earnings has just started. And if you think that India will follow the US experience, then given Indian interest rates, how would you value an earning stream that would shrink for 7 years before expanding again? Think…
Second, if you have to look at the chart, then please also look at the price movement of the stock when the earnings were declining. The stock basically fell by about 75%.
Just keep those two things in mind!
Cheers everyone!
No Position.