5 Psychology Traps that Investors Need to Avoid

Benjamin Graham once said that “an investor’s chief problem and even his worst enemy- is likely to be himself.” 

When it comes to investing, humans go through a ‘roller-coaster of emotions’ as shown below.

The Roller Coaster cycle of Investing (Courtsey : Credit Suisse)

This has led to the emergence of behavioural finance, a new field that aims to shed light on investors’ behaviour in financial markets.

5 important and common biases amongst investors 

Anchoring Bias 

Anchoring Bias occurs when people rely too much on a reference point in the past when making decisions for the future- that is they are ‘anchored’ to the past. 

For example, if you had a favourable return on a stock when you first invested in it, your perception on the future returns of stock is positive even when there may be clear signs indicating that the stock might take a dive. 

Herding

Also known as the mob mentality, is a tactic that was passed on from our ancestors and believes that there is strength in numbers. 

Ironically, this herding mentality among investors is the major reason for ‘bubbles’ in the financial markets. 

However, people are quick to dump stock when a company receives bad press or go into a buying frenzy when the stock does well.

As an investor, you should perform your own analysis and research on every investment decision and avoid the temptation to follow the majority.

Loss Aversion

Loss Aversion is when people go to great lengths to avoid losses because the pain of a loss is twice as impactful as the pleasure received from an investment gain. 

As emotional beings, we often make decisions to avoid a loss, this could involve investors pulling their money out of the market when there is a dip which leads to a greater cash accumulation or to avoid losses after a market correction investors decide to hold their assets in the form of cash.

Superiority Trap 

Confidence is an asset when it comes to investing in the stock market, but over-confidence or narcissism can lead to an investor’s downfall. 

It is important to remember that the financial market is a complex system made of many different elements and cannot be outwitted by a single person.  Overconfidence is the most dangerous form of carelessness. 

Confirmation Trap 

Confirmation trap is when investors seek out information that validates their opinions and ignores any theories that refute it.

When investing in a particular stock that believe will result in favourable returns, an investor will filter out any information that goes against their belief. 

For instance, an investor will continue to hold on to a stock that is decreasing in value simply because someone else is doing the same. The investors help validate each other’s reasons for holding on to the investment, -this, however, will not work in the long-term as both investors may end up in a loss. 

(Disclaimer : This blog is for information purposes only)

Steps to Stock Selection - for Investing in the Indian Markets

 “Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” -

Warren Buffett


A brief note on the Steps to select a stock to invest into in the Indian Stock Market 

1.Management of the company 

1. Efficiency and consistency of management (longevity as well..)
2. Strategy and goals of the company.
3. Execution Potential and consistency of execution. 
4. Insider buying and buybacks ( we do not like this) 
5. Perks and Compensation to Staff and Workers '
6. Transparency 

2. Fundamentals of the company.

1. Earnings per share (EPS)
2. Price to Earnings Ratio (p/e)
3. Price to Book Ratio (p/b)
4. Debt to Equity Ratio
5. Return on Equity 
6. Price to Sales 
7. Current Ratio
8. Dividend Track Record 
9. Sales growth and Operating Profit Margin

3. Do we understand the products and services offered by the company.  What we do not understand we do not buy?

4.Will people still be using the products and services of this company 10-15 years from now. (at least 5 years !)

5. Does the company have a low cost competitive durable advantage?

6. Does the Company have a MOAT

1. MOAT in stock market investing is a term coined by Warren Buffet.
2.  A moat is a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack. Some stocks have a similar moat around them. That’s why it’s really tough for its competitors to defeat them in its sector.

7.What  is the company doing that its competitors are not?

A portfolio based on these parameters does not necessarily track the stock market indices - but provides an equity investing portfolio which is consistent on returns and offers a lower risk within the equity asset class.  

On a risk return perspective it is certainly a theme in which your monies should be invested to start with.  Risk can then be further increased if returns are favorable. 

DISCLAIMER :  THIS BLOG IS FOR INFORMATION AND NOT TO SOLICIT ANY BUSINESS. PAST PERFORMANCE IS NOT AN INDICATION OF THE PERFORMANCE OF STOCK IN FUTURE. EQUITY STOCK INVESTING IS A WITH RISK INVESTING INCLUDING RISK ON CAPITAL INVESTED. PLEASE TAKE AN INFORMED DECISION BEFORE INVESTING IN A EQUITY STOCK.

Risk and the emotional roller coaster of investing. Why Risk is behavioural also.

Risk particularly in finance and investment is often framed in cold and calculating terms, but such an approach can lead us to neglect its very human features.

More often than simply "an absence of certainty" risk is about our inability to deal with probabilities ( of gain and loss as markets go up and down) in a consistent and coherent fashion. 

This causes discomfort.

How we experience and perceive risk is uniquely personal but at the same time certain trends are obvious. 

4 common biases tend to exist among investors 

1. Overconfidence 
2. Reducing Regret 
3. Limited Attention Span; 
4. Chasing Trends 

If you see yourself in any of these biases then the best way to avoid pitfalls of human emotion is to identify the emotion. 

You cannot avoid all behavioural bias but you can minimize the effect. 

"Be fearful when others are greedy and greedy when others are fearful". Warren Buffet. 

Easier said than done - but then that's why execution is the key. 

Many authors have written on psychological or behavioral traps that lead people in the wrong direction with their lives in general.

Quite frequently, some classic forms of dysfunctional psychology are directly evident in investing behavior.

#1. Anchoring Trap 

This refers to an over-reliance on what one originally thinks. 

Imagine betting on a boxing match and choosing the fighter purely by who has thrown the most punches in their last five fights. You may come out all right by picking the statistically more-active fighter, but the fighter with the least punches may have won five bouts by first-round knockouts. Clearly, any metric can become meaningless when it is taken out of context.

In order to avoid this trap, you need to remain flexible in your thinking and open to new sources of information, while understanding the reality that any company can be here today and gone tomorrow. Any manager can disappear too, for that matter.

#2. Sunk Cost Trap 

The sunk cost trap is just as dangerous. This is about psychologically (but not in reality) protecting your previous choices or decisions — which is often disastrous for your investments. It is truly hard to take a loss and/or accept that you made the wrong choices or allowed someone else to make them for you. But if your investment is no good, or sinking fast, the sooner you get out of it and into something more promising, the better.

#3. Confirmation Trap  

Similarly, in the confirmation trap, people often seek out others who have made and are still making, the same mistake. If you find yourself saying something like, "Our stocks have dropped by 30 percent, but it’s surely best just to hang onto them, isn’t it?" then you are seeking confirmation from some other unfortunate investor in the same situation. You can comfort each other in the short run, but it’s just self-delusion. 

#4. Blindness Trap 

Situational blindness can exacerbate the situation. Even people who are not specifically seeking confirmation often just shut out the prevailing market realities in order to do nothing and postpone the evil day when the losses just have to be confronted.

#5. Relativity Trap  

The relativity trap is also there waiting to lead you astray. Everyone has a different psychological make-up, combined with a unique set of circumstances extending to work, family, career prospects and likely inheritances. This means that although you need to be aware of what others are doing and saying, their situation and views are not necessarily relevant outside their own context.

Be aware, but beware too! You must invest for yourself and only in your own context. Your friends may have both the money and the risk-friendliness to speculate in pork belly futures (as in the movie "Trading Places"), but if you are a modest earning and nervy person, this is not for you.

#6. Irrational Exuberance Trap 

When investors start believing that the past equals the future, they are acting as if there is no uncertainty in the market. Unfortunately, uncertainty never vanishes.

There will always be ups and downs, overheated stocks, bubbles, mini-bubbles, industry-wide losses, panic selling in Asia and other unexpected events in the market. Believing that the past predicts the future is a sign of overconfidence. The investors who get hit the hardest — the ones who are still all-in just before the correction — are the overconfident ones who are sure that the bull run will last forever. Trusting that a bull won't turn on you is a sure way to get yourself gored. 

#7. Pseudo-Certainty Trap 

This phrase is an observation of investors' perceptions of risk. Investors will limit their risk exposure if they think their portfolio/investing returns will be positive – essentially protecting the lead – but they will seek more and more risk if it looks like they are heading for a loss.

Basically, investors avoid risk when their portfolios are performing well and could bear more, and they seek risk when their portfolios are floundering and don't need more exposure to possible losses. This is largely due to the mentality of winning it all back. Investors are willing to raise the stakes to "reclaim" capital, but not to create more capital. How long would a race car driver survive if he only used his brakes when he had the lead?

#8. Superiority Trap 

For some people, the superiority trap is extremely dangerous. A lot of investors think they know better than the experts or even the market. Just being well-educated and/or clever does not mean you wouldn't benefit from good, independent advice. Also, it doesn't mean you can outwit the pros and a complex system of markets either. Many investors have lost fortunes by being convinced that they were better than the rest. Furthermore, these people are easy prey for some of the other traps mentioned above.

The Bottom Line  

Human psychology is a dangerous thing, and there are some alarmingly standard mistakes that people make again and again. It is very easy in the heat of the moment, or when subject to stress or temptation, to fall into one of these mind traps. The wrong perceptions, self-delusion, frantically trying to avoid realizing losses, desperately seeking the comfort of other victims, shutting out reality and more can all cost you dearly.

Be aware of the nature of these traps and always be honest and realistic with yourself. Furthermore, seek advice from competent and knowledgeable people of integrity who will bring you back to reality before it is too late. 

DISCLAIMER :  THIS BLOG IS FOR INFORMATION AND NOT TO SOLICIT ANY BUSINESS. PAST PERFORMANCE IS NOT AN INDICATION OF THE PERFORMANCE OF STOCK IN FUTURE. EQUITY STOCK INVESTING IS A WITH RISK INVESTING INCLUDING RISK ON CAPITAL INVESTED. PLEASE TAKE AN INFORMED DECISION BEFORE INVESTING IN A EQUITY STOCK

Amid pandemic, while most Indian startups are struggling for funds, four have become unicorns

Unicorns in Corona Crisis 

The virus outbreak and the nationwide lockdown that ensued have thrown up funding and business continuity challenges for many in the Indian startup ecosystem. More than half of Indian startups are struggling to raise fresh funds

Four Indian tech startups became unicorns, or private companies valued at over $1 billion, in the middle of the pandemic.

These are – 

1. online beauty products retailer Nykaa, 
2. tech firm Postman, 
3. education startupUnacademy and 
4. fintech firm Razorpay 

India’s total unicorn count is now  33.

Challenges faced by Indian Startups During Corona Lockdown 

The virus outbreak and the nationwide lockdown that ensued have thrown up funding and business continuity challenges for many in the Indian startup ecosystem. More than half of Indian startups are struggling to raise fresh funds.

Consider startups in the hospitality sector. Since the possibility of travel and tourism has been next to nil over the past six months, and with revival of the sector expected to take anywhere six to 12 months from now due to the apprehensions of the public regarding infection and safety, enterprises in the hospitality sector have been struggling just to stay afloat.

If startups in the hospitality industry are faring badly, social sector enterprises are in a worse state.  The pandemic has increased the risks for staff to work on the field. Anyone with Covid-19 symptoms have had to go into quarantine, which affected the ongoing projects.

New investors are risk averse. CSR funds are also not available since all private companies are practicing conservative spending for the rest of the financial year to prepare for the full economic impact of the pandemic in 2021.

Not all are suffering 

Not all startups are suffering though. Those in e-learning (think Byju’s and other online learning apps), e-commerce (Grofers and Big Basket) and health spaces are flourishing. 

(Disclaimer : This blog is for information purposes only.)

Wuhan Corona Virus aka COVID 19 pandemic - data and new learnings - Courtsey Mckinsey

Chronology

17th November 2019 - According to The South China Morning post the first case of the 2019 Corona Virus - also called as Covid -19 was first discovered in Wuhan.

20th December 2019 - There were at least 60 confirmed cased of the Virus and a lockdown was imposed. (Source : The Guardian)

31st December 2019 - China informed WHO of the situation calling it a "pneumonia of unknown cause" (Source : The WHO website)

10th of January 2020 - WHO issued its first guidance - calling the virus as "Novel Coronavirus" (Source : The WHO website)

23rd January 2020 - The Chinese Govt. announced lockdown of Wuhan (Source : Wikipedia)

30th January 2020 - First case of Corona Virus is discovered in India as a student from Wuhan travels to Kerala, India and tests positive. (Source : Wikipedia)

11th March 2020 - WHO declares Novel CoronaVirus also called as Covid -19 a "pandemic" (Source : The WHO website)

24th March 2020 - The Govt. of India announces a 21 day nationwide lockdown. (Source : Wikipedia)

NIFTY (past 1 year) - fall due to lockdown and after impact 

Situation now and Analysis - Wuhan Corona Virus 

(Disclaimer : This blog is for information purposes only)

Behavioural Biases in Investment Decision Making

What Is Bias? 

According to Investopedia - A bias is an illogical preference or prejudice. It's a uniquely human foible, and since investors are human, they can be affected by it as well. Psychologists have identified more than a dozen kinds of biases, and any or all of them can cloud the judgment of an investor.

Some of the well documented biases that are observed in Investment Decision Making are 

Optimism or Confidence Bias -: Investors cultivate a belief that they have the ability to outperform the market based on some investing success.  Investing on objective information tends to remove this bias. 

Familiarity Bias -: This bias leads investors to choose what they are comfortable with.  This may be asset classes they are familiar with, stocks or sectors they have greater information and so on. This bias can lead to concentrated portfolios. 

Anchoring -: Investors hold on to some information that may no longer be relevant and make their decisions based on that.  New information is based as incorrect or irrelevant and ignored in decision making process. 

Loss Aversion -: The fear of losses leads to inaction.  Studies show that the pain of loss is twice as strong as pleasure that felt at a gain of a similar magnitude.  Investors prefer to do nothing despite information and analysis favouring a particular action that in the mind of the investor may lead to a loss. 

Herd Mentality -: This bias is an outcome of uncertainty and a belief that others may have better information, which leads investors to follow the investment choices that others make. 

Recency Bias -: The impact of recent events on decision making can be very strong.  This applies equally to positive and negative experiences.  Investors tend to extrapolate into the future and expect a repeat.  A bear market or a financial crisis lead people to prefer safe assets.

Choice Paralysis -: The availability of too many options can lead to a situation of not wanting to evaluate and make a decision.  Too much information also leads to a similar outcome on taking action. 

(Disclaimer : This blog is for information purposes only)

How good are Covid-19 - WuhanCoronaVirus; vaccine candidates

Race for the Vaccine 

Researchers worldwide are working around the clock to find a vaccine against SARS-CoV-2, the virus causing the COVID-19 pandemic.  

To date, just two coronavirus vaccine has been approved.

1. Sputnik V – formerly known as Gam-COVID-Vac and developed by the Gamaleya Research Institute in Moscow – was approved by the Ministry of Health of the Russian Federation on 11 August. Experts have raised considerable concern about the vaccine’s safety and efficacy given it has not yet entered Phase 3 clinical trials.
2. A second vaccine in Russia, EpiVacCorona, has also been granted regulatory approval, also without entering Phase 3 clinical trials.

Operation Warp Speed 

The pandemic has created unprecedented public/private partnerships. Operation Warp Speed (OWS) is a collaboration of several US federal government departments including Health and Human Services and its subagencies, Agriculture, Energy and Veterans Affairs and the private sector. 

OWS has selected three vaccine candidates to fund for Phase 3 trials: 

1. Moderna’s mRNA-1273, University of Oxford and AstraZeneca’s AZD1222, and 
2. Pfizer and BioNTech's BNT162.

Pfizer and BioNTech were the first to release early findings on November 09 when they reported that their BNT162b2 vaccine is 90 percent effective against Covid-19. 

There was more good news yesterday when Moderna stated that their candidate is 94.5 percent effective. 

 
In both cases, the shot is administered twice over the space of several weeks. 

Despite the positive results, there is no data regarding whether the candidates prevent the coronavirus from being transmitted as well as for how long protection lasts. 

The Moderna vaccine does have an advantage over the Pfizer/BioNTech one in that it can be stored at temperatures of between 2C and 8C for 30 days, making distribution easier. 

The Pfizer/BioNTech vaccine, on the other hand, must be stored at -80C, exacerbating logistical challenges. 

 

Within OWS, the US National Institutes of Health (NIH) has partnered with more than 18 biopharmaceutical companies to accelerate development of drug and vaccine candidates for COVID-19 (ACTIV). 

COVPN and COVAX

The COVID-19 Prevention Trials Network (COVPN) has also been established, which combines clinical trial networks funded by the National Institute of Allergy and Infectious Diseases (NIAID): the HIV Vaccine Trials Network (HVTN), HIV Prevention Trials Network (HPTN), Infectious Diseases Clinical Research Consortium (IDCRC), and the AIDS Clinical Trials Group.
 

The COVAX initiative, part of the World Health Organization’s (WHO) Access to COVID-19 Tools (ACT) Accelerator, is being spearheaded by the Coalition for Epidemic Preparedness Innovations (CEPI); Gavi, the Vaccine Alliance; and WHO. 

The goal is to work with vaccine manufacturers to offer low-cost COVID-19 vaccines to countries. 

Currently, CEPI’s candidates from companies 

1. Inovio, 
2. Moderna, 
3. CureVac, 
4. Institut Pasteur/Merck/Themis, 
5. AstraZeneca/University of Oxford, 
6. Novavax, 
7. University of Hong Kong, 
8. Clover Biopharmaceuticals, and 
9. University of Queensland/CSL 

are part of the COVAX initiative. There are further candidates being evaluated in the COVAX Facility from the United States and internationally.

(Disclaimer : This blog is for information purposes only) 

Risk Management in Investing - The most important thing.

 

What is it? 

Risk Management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions. 

Risk is inseparable from returns in the investment world. 

Inadequate risk management can result in severe consequences e.g. subprime mortgage meltdown in 2007 that helped trigger the Great Recession stemmed from bad risk management decisions. 

How to measure risk 

A variety of tactics exist to ascertain risk; one of the most being standard deviation,  a statistical measure. (of dispersion around a central tendency).

Beta, also known as a market risk, is a measure of the vocality, or systematic risk, of an individual stock in comparison to the entire market. 

Alpha is a measure of excess return.  Managers who employ active strategies to beat the market are subject to alpha risk. 

In simple terms how much volatility (measured by standard deviation) an investor should accept depends entirely on the individual investor's tolerance for risk. The use of Beta and Alpha in a portfolio is best understood by the graph below. 

In simple words Beta is the gradient of the line.  And it means that a a manager employing a passive management strategy can attempt to increase the portfolio return by taking one more unit of risk and vice versa. 

Active managers hunt for Alpha - the measure of excess return.  In the above diagram represented by "a". 

According to "Investopedia" -  "In their quest for excess returns, active managers expose investors to alpha risk, the risk that the result of their bets will prove negative rather than positive. For example, a fund manager may think that the energy sector will outperform the S&P 500 and increase her portfolio's weighting in this sector. If unexpected economic developments cause energy stocks to sharply decline, the manager will likely underperform the benchmark, an example of alpha risk."

Types of Risk

Every saving and investment product has different risks and returns. Differences include: how readily investors can get their money when they need it, how fast their money will grow, and how safe their money will be. In this section, we are going to talk about a number of risks investors face. They include:

Business Risk

With a stock, you are purchasing a piece of ownership in a company. With a bond, you are loaning money to a company. Returns from both of these investments require that that the company stays in business. If a company goes bankrupt and its assets are liquidated, common stockholders are the last in line to share in the proceeds. If there are assets, the company’s bondholders will be paid first, then holders of preferred stock. If you are a common stockholder, you get whatever is left, which may be nothing.

If you are purchasing an annuity make sure you consider the financial strength of the insurance company issuing the annuity. You want to be sure that the company will still be around, and financially sound, during your payout phase.

Volatility Risk

Even when companies aren’t in danger of failing, their stock price may fluctuate up or down. Large company stocks as a group, for example, have lost money on average about one out of every three years. Market fluctuations can be unnerving to some investors. A stock’s price can be affected by factors inside the company, such as a faulty product, or by events the company has no control over, such as political or market events.

Inflation Risk

Inflation is a general upward movement of prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest. The principal concern for individuals investing in cash equivalents is that inflation will erode returns.

Interest Rate Risk

Interest rate changes can affect a bond’s value. If bonds are held to maturity the investor will receive the face value, plus interest. If sold before maturity, the bond may be worth more or less than the face value. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. To sell an older bond with a lower interest rate, you might have to sell it at a discount.

Liquidity Risk

This refers to the risk that investors won’t find a market for their securities, potentially preventing them from buying or selling when they want. This can be the case with the more complicated investment products. It may also be the case with products that charge a penalty for early withdrawal or liquidation such as a certificate of deposit (CD).

(Disclaimer : this blog is for information only)

Fundamental Analysis, sentiments and euphoria.

Fundamental Analysis 

Fundamental Analysis is about understanding the qualitative and quantitative factors that impact the earnings of a company. This analysis used to make an estimate of future earnings of the company. 

Analysts follow two broad approaches to Fundamental Analysis - top down and bottom up analysis. 

EIC framework 

EIC framework is the commonly used approach used to understanding fundamental factors impacting the earnings of the company, scanning both the micro and macro data and other information. 

EIC framework consists of 

1. Economic Factors 
2. Industry Factors 
3. Company Factors 

Economic factors 

Some of the indicators to be studied are 

• GDP - Gross Domestic Product (including GDP growth)
• IIP - Index of Industrial Production 
• Economic policy has an impact on the performance of most business.  Direct and Indirect taxes, tax concessions and tax holidays impact business decisions.
• Fiscal Policy impacts government and private spending patterns and market borrowing.
• Monetary Policy impacts expectations for interest rates and inflation.  External policies impact relative competitiveness of exports and imports and currency rates.  

Tracking policy stance is critical part of economic analysis 

Industry Factors 

Some of these factors which are to be studied are 

• Regulations 
• Entry Barriers 
• Cost 
• Seasonal Factors 
• Cyclicality 

These are some of the examples of industry factors.  There can be various other factors such as supply and demand, price elasticity, market segments, market shares and technology. 

Analyst reports that speak of industry margins, industry PE and industry growth rates, consider these factors and their impact on other companies. 

Company Factors

Analysis of company factors encompasses the following 

• Ownership structure 
• Capital Structure 
• Capital Expenditure 
• Product Segments 
• Market Share and growth rates 
• Competitive environments 
• Management strategy and quality 
• Financial History and prospects
• Market price statistics 
• Risk factors to revenue and earnings 
• Investment rationale 
• Estimates for growth, margins and earnings 
• Valuation of the shares 

Apart from this detailed financial analysis for the company also forms a part of Fundamental Analysis.

Tools 

In the current context there are various websites which offer specific information and tools to analyse the performance of a company 

Some of these websites are 

1. screener.in 
2. trendlyne.com 
3. stockedge.com

 

Sentiments and Euphoria 

In contrast to the study of fundamental analysis the stock markets - especially in short term tend to be noisy - and reactive - going up and down as fear and greed play amongst stock market participants. 

However in the long term fundamental factors stand out.  

This in essence is the "art of investing". easier said than done. 

(disclaimer : this blog is for information purposes only)

In markets, bigger is less riskier and gives better returns - fails CAPM - Capital Asset Pricing Model - How?

Capital Asset Pricing Model 

According to Investopedia - "The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital."

Problems With the CAPM 

There are several assumptions behind the CAPM formula that have been shown not to hold in reality. Modern financial theory rests on two assumptions: 

(1) securities markets are very competitive and efficient (that is, relevant information about the companies is quickly and universally distributed and absorbed); 

(2) these markets are dominated by rational, risk-averse investors, who seek to maximize satisfaction from returns on their investments.

In real life....

In real market terms none of the these assumptions are 100% correct.  Even when the trading terminals have become electronic, financial results are announced over the internet and TV , there still are inefficiencies in the dissemination of information. 

Also all investors may not the equally inclined to collect the same type of information.

This creates bias.

Moreover what is the correctness in a management of a company providing for financial results and guidance of future performance.  

There is vast information available on irregularities of companies - having hidden sensitive information from investors.  

Flight to safety 

In uncertain times, the investor behaviour is to move capital towards safety - which in the equity market terms can also be interpreted as - surety of returns. 

Investors tend to believe that a company which has generated profits consistently, enjoys a market leaders position, has a superiors business model - will again provide for good numbers.  This means it will again generate profits and make its business even more stronger. 

And hence, even though these stocks are very expensive, money still moves to these stocks. 

Let's look at some examples. 

International Stocks 

Apple stock - last 5 years

Steve Jobs unfortunate demise - October 5, 2011.  Many critics of Apple had predicted the downfall of the company post Steve Jobs. 

Apple Stock over last 5 years is approx 5 times. 

Microsoft stock - last 5 years

Indian Stocks 

Reliance stock - last 5 years

TCS stock - last 5 years

Nestle India stock - last 5 years

Asian Paints stock - last 5 years

(Disclaimer : This blog is for information purposes and not to solicit any business or provide any kind of investment advise.)