Wednesday, October 27, 2010

The New Market Bubble

Is there a market bubble going on now? Is the markets going higher or lower? Should I put my money in the markets now? Will the markets crash? These are some of the questions I keep getting from people I know.

Manias, panics, excesses, whatever you may decide to term them as, rarely come gift-wrapped announcing itself beforehand. Just the fact that everyone around is so cautious negates the herd mentality and makes it more difficult for the market to crash.

So, does it mean, you should put all your money in the markets now? My answer to that is, "It depends...". Like in everything in life, investment is a very individual process and it is not possible to comment on personal investment decisions without having a good understanding of your aspirations, risk appetite, personality and other such traits. The best way to invest is to always look for undervalued stocks and periodically buying into them.

Does it mean that there is no bubble in the markets? Where is so much liquidity going? Where is the retail investor going? I think, that the next bubble is just starting. And it is in the PSU IPO space. Look at the response to Coal India. The company is not bad. But neither is it an absolute gem. It has stopped investing in deep-well coal extraction technologies a long time back and today does not have a good capability of extracting coal from very deep coal mines, which is typically the best quality. The "coal washing" process that the MD talked about is also not so easy to do. It requires huge quantities of water and involves a lot of pollution issues. Coal mines are typically not in areas where there is abundance of water, so it is not going to be easy. But no one is really concerned. The government having tasted blood is now looking to make their next bite. They will come up with other IPOs or FPOs. In the meantime, these PSUs will not have any autonomy of functioning. The OMCs (oil marketing companies) will again getting whammed as the oil prices go up and political compulsions push them to subsidizing votebanks again.

So, be wary of the PSU IPO game. Hope for the best but be prepared for the worst.

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