The herd is buying Telstra

December 9th, 2006

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Today, this article, Telstra rise surprises even its biggest boosters, caught our eye. Ever since Telstra?s T3 receipts were listed in the stock exchange, it had risen from its offer price of $2 to last Friday?s close of $2.51. That?s a growth of 25.5% in just three weeks! From what we learnt in that article, sentiments seemed to be turning in favour towards Telstra again (or maybe towards telecommunication companies globally in general). Major brokers like Macquarie, Citigroup and ABN Amro have been upgrading their recommendations for Telstra.

We find this rather amusing.

Not long ago, while Telstra?s T3 receipts were being offered to the public, the crowd were scoffing at Telstra. The mood against that company was one of anger, disgust and ridicule. As we said before in Is the Telstra T3 offering worth a buy?, our advice is: get even, not mad with Telstra. Joining in the mob mentality is not going to do ourselves any favour when it comes to making investment decisions that require rational thinking. Before we decide whether to invest in any business, we should be making a meticulous evaluation on its merits and the maximum price that we are willing to pay for it. After we invest in the business, we should stick with it, unless new facts, evidences or developments have emerged to undermine the intrinsic worth of the business.

But as we can see, the market is often tossed and turned by every whim of emotions. It is very amusing to see those major brokers suddenly changing their minds about Telstra at about the same time. There are now talk that the Telstra share price was undervalued, implying that the government had sold it too cheaply. We guess the insiders who bought Telstra shares probably saw that fact too (see Insiders buying Telstra). As a result, the crowd are now rushing back to buy Telstra shares.

But dear readers, how much of Telstra?s intrinsic worth had changed since the T3 sale? Not one iota! Since the basis for Telstra?s long-term future had not changed within that space of time, why did those major brokers suddenly change their mind? Had they fallen asleep behind the wheel and suddenly wake up to find the beauty of Telstra?

We prefer not to disclose our cynical theories here.

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