a stock has to crash some day.
many small caps remain small caps
all thru their life
and fade away as penny stocks.
some become mid caps
and few large caps!
when a penny or new comer company behind the stock starts growing
the stock starts rising much faster than the growth.
its because the price the stock commands in the market
includes the stocks prsent worth as well as its futuristic expected and estimated worth.
with time penny stock becomes small cap and then medium cap.
the premium that stock commands till that time is very high.
thereafter, the increase in growth rate determines the premium and not the growth itself.
for example, if the growth of the company were to be 12% viz a viz 15% it has been clocking since some quarters or years the share price of the company is set to nose dive despite that fact it is still growing. reason? the premium of ever-increasing growth expectation needs to come down.
if the dream run of the conpamy has not ended till that time
it still continues thereafter
but the management increasingly finds it difficult
to maintain the scorching (rather ever increasing and often unreasonable) rate of growth.
it fails to live upto the unreasonably high expectations.
expectations decide the stock price more than the reality which limits itself to bookvalue.
some companies finally go global, increase their market size to keep growing.
but in doing so they face increasing competition, price pressures etc.
and hence start struggling.
but some great great companies
survive this jet thrust and
keep growing.
but in the process they only delay the inevitable.
they again reach the stage sooner or later
when they find it difficult to match the expectations and p/e of the share holders.
some very smart companies buck even this reality.
they divide the company into many companies, make every new baby focus on a core competence and try and maintain the growth pace.
some succeed, some succumb.
even those who succeed, again face the growth speedbreaker and stumble at the growth sustainence promise to the investors.and mind you, i have not yet discussed the effects of recession, effects of changes in technology which render many a company obsolete etc.
finally, the inevitable happens.
company's growth rate starts tapering.
the premium dissolves and evaporates.
the blue eyed boy removes the goggles of promise, wears the spectacles of respect and reputation and accepts the valuation directed towards its book value with a consolation of annual pension called dividend.
every stock has to crash someday to ground of reality.
how long that can be prolonged is the real question.
those who buy blue eyed babies and keep the stocks in lockers, must take out and encash them while the baby has still not reached the middleage.
many small caps remain small caps
all thru their life
and fade away as penny stocks.
some become mid caps
and few large caps!
when a penny or new comer company behind the stock starts growing
the stock starts rising much faster than the growth.
its because the price the stock commands in the market
includes the stocks prsent worth as well as its futuristic expected and estimated worth.
with time penny stock becomes small cap and then medium cap.
the premium that stock commands till that time is very high.
thereafter, the increase in growth rate determines the premium and not the growth itself.
for example, if the growth of the company were to be 12% viz a viz 15% it has been clocking since some quarters or years the share price of the company is set to nose dive despite that fact it is still growing. reason? the premium of ever-increasing growth expectation needs to come down.
if the dream run of the conpamy has not ended till that time
it still continues thereafter
but the management increasingly finds it difficult
to maintain the scorching (rather ever increasing and often unreasonable) rate of growth.
it fails to live upto the unreasonably high expectations.
expectations decide the stock price more than the reality which limits itself to bookvalue.
some companies finally go global, increase their market size to keep growing.
but in doing so they face increasing competition, price pressures etc.
and hence start struggling.
but some great great companies
survive this jet thrust and
keep growing.
but in the process they only delay the inevitable.
they again reach the stage sooner or later
when they find it difficult to match the expectations and p/e of the share holders.
some very smart companies buck even this reality.
they divide the company into many companies, make every new baby focus on a core competence and try and maintain the growth pace.
some succeed, some succumb.
even those who succeed, again face the growth speedbreaker and stumble at the growth sustainence promise to the investors.and mind you, i have not yet discussed the effects of recession, effects of changes in technology which render many a company obsolete etc.
finally, the inevitable happens.
company's growth rate starts tapering.
the premium dissolves and evaporates.
the blue eyed boy removes the goggles of promise, wears the spectacles of respect and reputation and accepts the valuation directed towards its book value with a consolation of annual pension called dividend.
every stock has to crash someday to ground of reality.
how long that can be prolonged is the real question.
those who buy blue eyed babies and keep the stocks in lockers, must take out and encash them while the baby has still not reached the middleage.
