Always buy quality stocks during a bull run

Amit Trivedi

“I like your mutual fund scheme, but its NAV is quite high. I suggest you launch a new scheme, which is an exact replica of the same. The benefit would be that one would be able to invest in a similar scheme at a much lower price.” – A discussion in 2005-2007.“Gold prices have gone up dramatically. One should consider buying silver. Between the two, gold only is a store of value, but silver also has industrial usage. Hence, the chances of price appreciation are much higher if you buy silver instead of gold.” – A discussion in 2009-2011.“Real estate in the city is very costly, can we look at something in the city outskirts?” – A discussion in 2007-2012.

You can see the obvious parallel in the above discussions. Only the time and the asset class are different. The flaw in thinking seems to be the same. People are seeking better value, but are looking at a wrong parameter. One has observed such thinking in many bull markets. As Sir John Templeton said, Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”, many investors are either pessimistic or skeptical in the beginning of a bull market – whatever the asset class. By the time, they realize that they are in the middle of a bull run; the high quality assets appear costly – if one is looking only at the price. So a bluechip stock would appear costly compared to a small cap one. Instead of looking at the ability to generate future profits, many start focusing only on the price per share. Instead of looking at the ability of the fund manager to manage the scheme, many consider only the NAV per unit of the fund. During the crazy bull run of 1999-2000, when technology stocks were going through the roof, any company with the word “Infosys” in its name was sought after since the original Infosys was looking costly. People lost money buying Infosys stock, but lost entire capital in some of the other companies with “Infosys” in the name.Equity market has run up quite a bit from the lows of August 2013. In such a scenario, most quality stocks look costly from their historic price points. History suggests that it is natural in such a scenario that investors may start looking at low-priced stocks irrespective of the quality of the company.The father of securities analysis, Benjamin Graham has said, “the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.”

It is important to remember this fact and act cautiously. Please remember, “tu nathi toh taro photo pan chaalshe …” is not just a popular song these days, but also a reflection of most bull markets. While buying any investments, make sure that you buy quality at reasonable price and not just something that is cheap or low-priced. The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com.