Posted by: alok | December 4, 2006

Finance Theory vs. Real Stock Market

Every now and then, the Indian stock market behaves in a way which makes me reconsider what I learnt in my finance classes. It behaves in ways quite contrary or radically different from what your finance professors will teach you. However, if you try to bring it out in a discussion, the justification will be – “Finance theories works well in efficient market, no information assymetry, lending rate is same as borrowing rate, and anyone can encash on any existing aribtrage” . I call these as “hypothetical conditions”, because I haven’t been able to find a market which is governed by these rules.

Efficient market hypothesis goes for a toss. A theory suggests that the current stock price factors in all future developments. So what drives the market more – emotions, hidden information or complex mathematical equations? I read the transcripts of Ramesh Damani’s chat on rediff and his statements on Godfrey Philips.

He sounded bullish on the stock; the market opens on Monday Nov. 27 with Godfrey Philips trading at 1050 and closes on Friday at 1450..!! An upswing of 40% in a week….!! I will let the picture do the talking…. (stock quotes from yahoo finance)

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Notice the price movements of the stock on 5 trading sessions Monday 27th to Dec 1st. The horizontal bars indicate the stock hitting the upper circuit within few minutes of market opening. Till now I considered Mr. Damani the Buffet of Indian Stock market, but now I am rating him as the George Soros of the Dalal Street. 🙂 He could visualize something which most (rather none baring a few) could see. Does this graph indicate that the price of a stock is the discounted future earnings? Or is it actually the proof of the efficient market hypotheses, concluding that a stock can’t remain undervalued for long – the arbitrage opportunities will bring the price to its correct value? But then, what’s the correct value of Godfrey Philips – 1050 or 1450?


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Responses

  1. Just to add… the stock hit the upper circuit today also, 🙂 and is now valued at 1531..!!!
    Unfortunately I don’t own this stock 😦

  2. My dear Alok

    Apart from the mathematical equations, don’t forget the basic supply/demand funda..if you have a steaming GDP (telling the world about our future growth potential) and the return hungry global investors, they will invest by bucket loads sending the stock prices spiralling high.

    As far as the correct price is concerned, it should be marked to market 🙂 So I think 1050 on monday and 1450 on friday 🙂 I think the TV (Theoretical value) is never the correct value…just an indicator to the true value..thats all!!

    Chatts

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