It is easy for fund managers and television anchors to talk about index being at a pe of 15…but let us not fool ourselves. There are many shares at pe of 58 and 38 – L&T, Tata Power to name a few. How does one deal with these companies? Well a little differently.
Why should you sell a L&T or a Tata Power? Because of something called sympathy selling. Let us say Reliance Mutual fund needs to find some cash. It can sell Reliance Energy, Reliance Power or Tata Power. Your guess is as good as mine as to which share they will end up selling. Similarly if a HNI client is trying to sell a Kerala Ayurvedic or a Deccan Gold and is unable to find enough buyers…he/she will end up selling the more liquid scrips like Tata Power, L&T…and then raid the cupboard to sell the family silver. Now will he sell the higher p/e shares or the lower p/e shares FIRST. Makes no sense, but he will sell the HIGHER p/e shares first EXPECTING other fund managers to do the same. This will ensure that the p/es of these companies will fall faster – and the price too. So if you have Cipla, Mrf, ITC, Hindalco,….you might bleed lesser than your friends in momentum stocks.
So if you have invested for returns like dividends….stick on…otherwise be on your toes.
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