The Hindu Business Line : Trader's Corner

As per Wikipedia, the word `glamour', originally meant casting a spell over someone, particularly to change how things appeared to them. This definition aptly describes the devastating effect that glamour stocks have on the traders and investors. They infuse the investors with a must-have feeling that becomes hard to justify at a later date.

Glamour stocks, or growth stocks as they're also known, have high ratings because they're sought after by investors. Prime example of such stocks are the Internet stocks during 1999 and 2000 that enjoyed a triple digit price to earnings multiple. The glamour stocks in the current market are those in the media and retail sector.

At the other end of the spectrum are the value stocks. Value stocks can be loosely defined as those that have low ratings or low price to earnings ratios. Though they are intrinsically sound, they are away from the public glare and hence are available at relatively cheaper valuations.

The two categories, glamour stocks and value stocks do not exist in water-tight compartments. Glamour stocks do fall out of favour and morph in to value stocks and vice versa. A paper by Mr Werner De Bondt of the University of Wisconsin and Mr Richard Thaler of the University of Chicago Business School formed a portfolio of winner and loser stocks. Winner stocks were defined as the glamour stocks and losers were the value stocks. They found that the thirty-five `loser' stocks in their portfolio subsequently outperformed the `winner' stocks, during the next three-year period, by twenty-five per cent.

This means that investors who are willing to play the waiting game ought to buy stocks with strong fundamentals but away from the public glare. They would make money in the long run. This kind of bargain hunting can be equated to buying umbrellas and raincoats after the monsoons when they are available at a discount.

Glamour stocks could be suitable for traders and investors who monitor their portfolios tightly. Since glamour stocks have valuations that stretch way beyond their true intrinsic worth, they are also vulnerable to a steep drop once the investors turn averse and the stampede begins to exit the stock.

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