2012 is drawing to a close and Indian markets have given close to 25% returns this year. And just like past years, experts are coming out with targets like 21,000, 23,000 & 26,000 for Sensex. It seems that everyone is anticipating a bull market. And this anticipation is fueled by buzz words like Reforms, FDI, coming rate cuts, rising investor sentiments, etc.
Before you close this website after reading our answers, we would like to tell you 2 things:
If a bull market is really coming, you will not listen to what we have to say. If markets correct next year, you will repent not listening to what we had to say.
So here is our answer:
We have decided not to make any predictions. It is irrelevant for long term investors like us. We will continue to invest in great companies and try buying them at really cheap prices.
So, have you decided to leave? Because you didn’t get that hot stock tip??
No?? …Then we will go ahead and tell you two really important facts…
Indian markets are currently (December 2012) trading at P/E multiples of 19. And this is not cheap by any standards. You can check State of the Markets to get a snapshot of Indian market’s valuations. We have an analysis which tells that investing at current levels may not turn out to be a good bet for next 3-5 years. Anything less than 3 years does not interest us. Just check the table below:
|P/E Ratio of Sensex & 3-5 Year Returns|
We are trading close to P/E multiple of 20. And average returns over 3 year periods are abysmally low at 4%. We won’t vouch for 5 year data as this number is skewed because of bull-run of 2002-07 (which may not be repeated during our lifetimes).
We checked last 20 years’ data and found that 13 of those years gave positive returns. Out of these, 6 can be attributed to Great Indian Bull Run (2002-07). So, there were 7 ‘normal’ years of positive returns. These 7 years were followed by 4 years of negative returns & 3 years of positive returns. Surprised? Yes… its true. The probability of getting positive returns, just after an year of positive return is lower than that of getting negative returns.
We are sorry to disappoint those who were looking for hot stock tips for 2013. We continue looking for safe, stable, rock solid, cash generating machines. We don’t know what would happen in 2013. But we do know what we would do in either cases. If markets correct, we would buy more of these great stocks. If it moves up into the overvaluation zone, we would not buy. It is as simple as that. 🙂 But as it has been rightly said, successful investing is simple, but not easy.