Caveat Emptor!!

Literally “Buyer beware”.

The Indian stock market continues to be in the push-pull mode with research houses split between where to invest in 2008. While the general tone of the market seems to be bullish, with research houses almost unanimous in putting Sensex targets around 23-24,000 by the end of the year 2008, the individual stock recommendations seem to be in disarray.

Everything in today’s market is up for sale. We believe that the situation is quite similar to one witnessed during the annual exhibition sale of wares by small traders/hawkers. During these sales, where a large number of buyers are visiting stalls of traders, one tends to play oneself to the mob psychology. We loosen our purse string to things we would not have bought in ordinary course, or unassumingly pay a price for an item which is not worth half of what we ended up paying.

This is precisely what’s happening in the current market scenario, we believe. Every time we loosen our purse string to buy a new idea, hot tip or the next growth company, we need to very careful of what we are buying. Like always, it is easier said than done.

What we said was evident with investors rushing to invest in mid-caps stock a few weeks ago as if there was no tomorrow, resulting in stock prices shooting by 40-100% in select mid-caps. Over the past week, however, the same stocks have pulled back around 20-30% and we believe that a very small percentage of investors have made money during this period.

5 questions to ask before you buy a mid-cap stock

  1. Do you really understand or made efforts to understand the business model?
  2. Have you done a gut check on the recent reported numbers by the company?
  3. Did you bother to check 3-4 basic valuation ratios of the company at the CMP?
  4. Have you decided the time horizon till which you will hold this ticker?
  5. Will you buy more of the stock if it tanks 35% or more after you bought?

    If the answer to ALL the above questions is a thumping YES than go straight ahead with your investment, else take time out and ponder a little more because the stock markets always opens in a few hours after they closes.

    And always remember the golden words ‘Caveat Emptor’.

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