Hot? Not much

HOT SECTOR

Not only analysts, even common people have started projecting tomorrows hottest sector. Sometimes it comes true, but in other occasions people are punished for having done the same. Is the myth - Tomorrow's sector real? The reason that I get from people are often blunt, the most common being India's growth story. I too believe that India is changing , but only to some extent. As a counter argument, India has been in the so called high growth path even in the past decade. So, going by their argument, India's thirst for power should have been met by now. Rural India in particular are struggling for power even now. At least, there is a 2 hour planned power cut daily in area, and it has been there for more than a year now. Are our power requirements met? If you're from a sophisticated city, you might nod your head. But I wont. Power cut, both planned and unplanned has not gone down for the past 5 years. How should I genuinely believe that in the next 5 years, the whole India's power requirements will be met? The same holds for education sector too. The government is talking about change in syllabus for school children. But, does it suffice? Does it guarantee that a farmer and a tailer can make their children get a college degree? I am really seeing the construction of new bridges throughout Chennai city. I would certainly say that the government is doing something about improving the infrastructure. However I don't really know whether we can reach the place of well grown foreign countries in 10 or 15 years. We might or we might not, I don't know the answer for sure. The so called "tomorrow's sector" has not shown any strength to the public yet. Given this scenario, do we really need to start investigating on tomorrows sector at all?



HOT IS NO MORE HOT

Go a decade back, you will find everyone yelling about IT stocks. Analysts were giving unreasonable valuations to all IT stocks. Now, come back to the present and take this small test.Do this small exercise and check whether I am right or wrong. Write all the company's name in IT industry. If you are not an IT person, I'm sure you might not cross 15 or so. But in India, there are thousands of IT companies now. So, why cant you think of anything more than 15? I will tell you why... A sector becomes hot when most of the companies operating in that sector start yielding high profits and high margins. The high profits automatically attract more competition. Existing companies diversify(diworsefy) in that sector to try out their luck. New companies start emerging. At the same time, people start giving crazy valuations to the sector, particularly during the bull run. Companies with no fundamentals will start issuing IPO's at unrealistic price. And boom... the sector has nothing in it anymore. Due to high competition, margins will reduce automatically. Revenues will come down dragging profits along with them. Analysts will re-rate the companies and throw the sector to dirt. At the end, there will be only few successful companies and a lot of zombies left.



WHAT YOU SHOULD KNOW

People who see sector growth at initial stages get profits if they do a timely exit. Others who believe on analysts lose their money. The same analyst who said that a stock is for long term (may be you can have it forever) will change their opinion in no time. Ask yourself this question - 'Is it worth the struggle?'. Do you really need to look for hot sectors? There are a lot of stocks out there which people are not looking at right now. You can't find a gem in a place were 8 million people (approximately that many people are investing directly or indirectly in Indian stock markets) are doing the same. Go to the deserted places. You may find one.