In today’s article I will share with you how costly mistakes can be made by investing in the stocks of good companies. Especially in times of stock market euphoria.
Infosys is accepted today by investors as a relatively clean company in terms of transparency with shareholders. When it was not mandatory to give half-yearly balance sheets they were already doing it. They started the practice of giving audited figures instead of unaudited figures for quarterly results too.
I asked a question about Infosys price to earnings ratio (P/E) on the Capital Orbit Facebook page a couple of days back. This article is the rest of the story.
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It is a stock accepted to be a wealth creator over the long-term by most investors. This statement is both true and false
It depends on when you entered Infosys.
Infosys stock chart
If for any reason the chart above does not show properly, you can see the static chart below.
- Infosys hit a high on 8 March 2000.
- If I were to calculate a price to earnings ratio (P/E) where I took earnings for FY2000, this would work out to a P/E ratio of 311.
This was the year dot-com boom turned into a dot-com bust. Before the storm, IT companies were the “chosen ones” in the stock market. Y2K conversions in IT systems were touted to be the next big thing. It was said that many IT companies in India would benefit from companies abroad who would start outsourcing more IT work to India.
Infosys did benefit. The company called Infosys.
The stock “investors” would tell you another story.
Though at such valuations, I am not sure whether they were investors as per Benjamin Graham’s definition that I covered in an earlier article.
Six long years before the shares of Infosys recovered
The share price reached the same level only in 11 August 2006. That is more than six years. Buyers of Infosys at the peak would have had to wait this long before they even saw the same price. That is a terribly long time.
To make precisely 0% capital gains in six years. Actually they got negative returns if you account for inflation as I explained in an earlier article.
Of course, Infosys paid dividends. But the meaty gains that people expected never materialized.
There is an opportunity cost to money. In these six years buyers of Infosys could have simply parked their money in fixed deposits for example. Or for that matter anything else that gave a decent return.
A great company does not necessarily mean a great stock
The best company can have a share price that indicates crazy valuation. You can make mistakes with such stock purchases.
On the flip side, I will grant you this. With great companies there is at least the chance of getting your initial investment back. Crazy valuations and bad companies will not let even allow you the happiness of seeing your initial capital.
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