Niraj
Do you really expect to get great stocks at low valuations when the market thinks that things are gung-ho for the sector? Markets often swing between too much optimism about the economy and/or particular sectors, and unwarranted pessimism. As stock investors, there is little we can do about it. We can’t control macroeconomics either. And a lot of the consensus that is out there about macroeconomic aspects changes so quickly, that it is simply impossible to predict. So there is little point about worrying about all these things.
Do I believe that Yes Bank is much better run than Syndicate Bank? Of course. I personally bank with Yes Bank. But the question at hand is what represents more inherent value. Colgate is a great, well run company. But do I want to buy it at an unrealistic valuation? One earnings disappointment at these valuations, and the so called prescient market will punish it like anything.
NMDC is a perfect example of both what is wrong with markets. Today, a lot of people blame the govt. for the mess in the NMDC stock, but the govt. has messed up lots of good companies it owns. Everyone knew this when NMDC was PE 25. And everyone knows it at PE 5. But will you lose money at PE 5? What are the chances of losing money at PE 5 compared with PE 25? Yet, you want to buy the so called “sector leaders” of the market’s favourite sectors which are trading at “reasonable” valuations less than 15-20 PE!!!
Of course, there are sometimes skeletons hidden in companies which trade at very low valuations. So as an investor, one must actively look out for these skeletons, and try to calculate how much damage they can cause to earnings. But if a company is available at a fraction of its book value, or its tangible networth, or its free cash flow, then sometimes these skeletons are less likely to be as material as the markets make them out to be.
Please don’t think I am having an unnecessary argument with you. Indeed, I had/have exactly the same investing mentality as you. But it was never successful for me. It is still extremely difficult for me to invest the way I am myself advocating. But I am trying desperately to stay away from the temptation of day to day market opportunities to a more disciplined, value based approach.