Beware of Sensex predictions

Tue, 15 Dec Pre-Open

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Sensex at 30,000 by 2016. Sensex at 40,000 by 2020. At 4,20,000 by 2030. These are the kind of predictions that experts like to make and investors like to read. As the New Year dawns you will find more such predictions coming your way.

Unfortunately while the predictions on Sensex can and will come true over time, not every investor will make money. The index moving from 30,000 to 40,000 to 4,20,000 is not entirely subject to the fundamentals of its constituents moving in either direction. For that matter not just the Sensex but even the BSE Midcap and Smallcap indices will move higher over time. But only a fraction of their current constituents will sustain or move into the orbit of higher market capitalization.

Take the cases of stocks like DLF, Financial Technologies, Aban Offshore, MMTC, Lanco Infratech and Indiabulls Real Estate. These were not just the predicted multibaggers during the heydays of realty and infra boom. But the companies were the stars of the stock market rally until 2008. Hence should the fact that they have lost 90% of their market capitalization come as a surprise to you? Or that nobody predicted that these stocks would be multi losers should completely shake your confidence in stock investing?

Well, the saga of Satyam like stocks hardly ended in 2008. Ranbaxy, DLF, Suzlon Energy and scores of such companies that were the blue eyed boys of stock markets have destroyed billions in investor wealth over past 7 years. While there are 219 penny stocks today that have shed most of their market cap in the last few years, 469 stocks have doubled during the same period. Thus the balance is still skewed in favour of investors who do some diligent stock picking rather than speculating.

Rest assured tons of data and complex calculations alone cannot tell you which stocks are the safest bets. In fact it is rather difficult to predict the multi losers over the longer term than the multi baggers. And its requires a lot of reading on the part of investors to know which companies are more likely to destroy wealth rather than creating it.

As Charlie Munger once said The wise investor should read extensively, analyze like a fox (as opposed to a hedgehog), and act decisively and in scale when the right opportunity presents itself.

Thus knowing what stocks to not invest in is as valuable as knowing which ones to expect big returns from.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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