The Bull Market fantasy … demystified …..

Let’s understand this better: “In a typical bull market, some story catches the fancy of investors and they start following it blindly, much like the rats who followed the Pied Piper of Hamelin,” says Ajit Dayal, Founder and Chairman, Quantum Mutual Fund. ‘Replacement cost theory’ was the theme that drove the 1992 bull market. The logic, put out by Harshad Mehta, was very convincing: Instead of setting up new capacity, foreign investors would buy Indian companies at replacement cost. This ‘replacement cost’ kept on increasing as the rupee depreciated and got reflected in higher domestic prices. The theme caught the fancy of the then Sensex heavyweights such as Hindustan Motors, Premier, Mukand, etc. are now nowhere in the market scene.

‘India growth story’ is the theme that is driving the market now. The plot of this story is that India will remain the fastest growing economy in the world for a long time and FIIs (foreign institutional investors) will flock to India to benefit from this growth. But how much of this story is really true, and how much is ‘flights of fancy’?

A SOUND strategy for investors is to entirely avoid trying to capture the next big gainers and stick with fundamentally strong companies. “Stick with stocks that show high growth and maintain high quality. That way you can participate in a bull market and the hit will be less in the next bear market,” says Raamdeo Agrawal, Joint MD, Motilal Oswal Securities.

“Stick with less leveraged (debt) companies, those with high governance standards and companies generating free cash flows over the years”, says Nilesh Shah, MD, Kotak Mahindra Mutual Fund. Finally, investors should also consider the price they are paying for this quality. “Shortlist companies based on their quality of management and business”.