Sunday, June 29, 2008

Is a falling stock price a bargain ?

In India, the bear market has caused havoc in the price of real estate stocks.
Sobha developers has fallen from a high of 1250 in December 2006 when it listed to 296 on June 27, 2008, Parasvanath from 600 to 132, Unitech from 560 to 182, Omax from 620 to 139, DLF from 1250 to 425.... I think you get the idea.
At this point, it is fair to wonder if these stocks are buying opportunities. After all, stock prices are unlikely to become zero. (see may earlier post below: How low is Low).
The question is: Should we buy real estate stocks now that they have fallen so much ?
The answer is: NO. In a falling market, trying to buy a bargain is like catching falling knives (you must have heard this on CNBC - this phrase is a favorite with analysts). After all, When DLF fell from 1250 to 600, it was a bargain, wasn't it ? But the price continued to fall, reaching 425. How do we know it is a bargain now ? Maybe, the final low will be 250. maybe not.
We should not try to forecast the lowest possible price in a bear market. We should let the market decide where the final lows will be made.
For traders, watching market movements will give a signal that a final low may be in place. How ? When a stock makes a higher low, this gives us the first signal the the stock price is finding support. This is the time to consider buying the stock. We may still go wrong since the price can fall again, but at least we have some basis for buying. Real Estate Stocks continue to make new lows, therefore they are not buying opportunities yet.
Patience. This is the biggest friend of the Investors & trader.