Way back in 2007, a good friend of mine called me to ask me to check out a company by name Jindal SouthWest Holdings Ltd. He said that he had heard from some one that it had quite a nice value and was currently trading at pretty discounted rates.
Checking on what I could, I saw that the Intrinsic value of the company (based purely on what it held) came to around 2500 – 3000 per share and the company was trading around 500 bucks (though a couple of years ago, one could have had it much cheaper). While in US, most holding companies are valued at pretty low discount rates, in India due to the fact that most of these holdings will never be sold, holding company valuations have never been aggressive to begin with.
Yet, the deep discount did entice me to invest into the same. The timing of my entry in hindsight proved to be one of great acumen as the stock straight away started to move substantially higher. At 2000, I decided to get rid of half my quantity but the stock showed no signs of weakness. At 3000, I got rid of the rest of it as well (to fund some other idea which ultimately ended up eating both my capital & profits :P).
But before I sold, I did a revaluation of the holdings and voila, instead of the 2500-3000 which was there before this rally started, the valuation had now changed to 5000-6000 🙂
This is not a story to boast my stock picking ability (which I have none anyways) but to remind one not to get carried away with the momentum. Some months back, I got into another stock – a very small quantity but one that has been moving pretty strongly on the back of a report of a small cap fund manager initiating a position in the said stock. While there has been no change in the fundamentals of the stock, the hype given the story and the person who picked it up has meant that the stock is now 300% above my purchase price.
But this cannot really last unless there is really a pot of gold at the end. I do not know when this will end, but the ending generally is not good either. A stock that moves up in Buying freeze generally comes back in selling freeze making it tough if not impossible to exit such stocks.
While not everyone can have a deep understanding of the DCF / SOTP), as a investor, its essential that you know what you are paying for. There is no point in paying 5 times the price just because of some hidden quality which may or may not materialize in the future.
Even in this bull market, there are plenty of stocks that are moving down and hence its always pays to be cautious and fearful than let the greed of easy money carry us away. I am a guy who can be called a perma-bull, but just because the long term is good and the road ahead is a path of roses, there will always be thorns that can cause significant damage to those who are unprepared.