Indian Markets At All Time Highs | Should You Buy? Or Should You Sell?

I recently shared this image on Stable Investor’s Facebook page.
 
Stock Market Buy Sell Low High

And to be honest, this is not the first time I am sharing this image with Facebook Fans. I have shared it more than thrice. And it is because the image is a very powerful depiction of what actually happens in our stock markets. Investors Market participants act so irrationally on just what they hear on the street that sometimes it seems market, is just one hell of an irrational place. But then this realisation occurs that it is because of this irrationality, that rational investors get an opportunity to make money in stock markets.
Just last week, markets hit a new life time high.
 
2008 Indian Market Crash New Highs
2008 – 2014 | Markets Reaching New Highs | But Does It Give Red Signals?

The rise this time is not as steep as it was in the run up to the crash of 2008. The PE of market at peaks of 2008 had reached almost 26!! Currently, markets are in more (not totally) rational territory of 18 to 19. But it seems that since 3 months, markets have started running ahead of their fundamentals. And if one uses a little common sense and is aware of stock markets, this can be cross checked with views floating in the market. Almost all experts of stock markets are coming out with buy calls and asking investors to go ahead and invest in currently rising market. And many are planning to ride this run up to the elections.
 
But a little rational thinking would make one realise that one should buy when prices are low, and not the other way round. Even the master investor Warren Buffet has said
 
 
And as of now, people intend to make quick money in the markets and are being greedy (to a degree).
 
But there is another interesting indicator which somewhat refutes the above stance. I just did a comparison of returns in last 5 years with that of returns in next 5 years. It was a simple exercise to see whether there exists a correlation between what has happened in last 5 years with what is about to happen in next 5 years.
 
And results of the analysis of 3614 data points (spanning more than 14 years) boils down to the following table –

Stock Market Returns 5 Years
 
Currently, Indian markets have given a return of almost 4.5% in last five years. This puts us in the second cell of table above; which translates into an average return of almost 14% in next five years. So does it mean that Sensex, which today stands at 21,919 would reach more than 42,000* by 2019??
 
* (Logic: This calculation is based on concept of compound annual growth rate. In this case, an average increase of 14% every year for next five years would take Sensex from 21919 to 42000)
 
I know you are thinking that this guy refutes anyone giving out predictions about future levels of Sensex. And here he himself is throwing numbers like 42,000 for Sensex in next 5 years!!
 
But please realise that this not me. It is the past that is speaking. And one cannot just depend on past data to predict future. So take the above numbers with a pinch of salt. Anyways, data is one thing and using this data another. So what should a sensible market-fearing investor do at this moment?
 
Since everyone is eager to buy, a sensible person would be better off not-buying. And if it means that you might just miss the next bull run, then so be it. It is always better to control the downside before worrying about the upside in stock markets. (My thoughts || You are more than welcome to differ) 🙂
 
If you have your SIPs in good mutual funds, then do not stop them. Just continue with them as in the long run, this stopping of SIPs might disturb the magic of compounding.  Keep accumulating money in fixed instruments to fund your next major stock buying opportunity when markets go down and everyone else is hell bent on selling everything they hold.
 
So, what are you going to do now? Will you buy? Will you sell? Or will you do nothing?
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Latest P/E Ratio Analysis of Indian stock markets

The markets are falling. Experts all over are painting the picture of India’s economic future with dark colors. People around you are selling shares and stopping SIPs in mutual funds.

So what exactly is happening? We tried answering this question in one of our previous posts titled What’s happening to stock markets, economy & your portfolioMany people known to us are exiting markets because markets have not produced any return for last 5 years. In fact, it has gone into negative territory in this 5 year period. But this very fact should have forced a sensible investor to think rationally and stay put in market. We did a small study some time back and came up with a conclusion that “If returns in last 5 years have not been great, chances of making higher returns in next 5 years are quite high.”

In fact, we started this website with posts evaluating traditional valuation parameters like PE etc for Indian markets. And surprisingly, we found a really interesting pattern which showed that Indian markets have a tendency to bounce between PE multiples of 12 and 24!!(see how here).

So we decided to see where exactly are Indian markets placed in terms of PE multiples when compared to historical levels.

As of now, Nifty (a benchmark index) has a P/E Ratio of 15.7. Now when compared with past data, this is not expensive at all (considering growing nature of Indian markets). But this time around, problems surrounding us (& lack of solutions) are forcing us to question the very nature and sustainability of India’s growth. Therefore, this PE Ratio of 15.7 cannot be considered to be cheap either.

So does it mean that markets will go down more? Does it mean that Indian markets are going to be re-rated soon? Frankly, we don’t have answers to such speculative questions. But yes, times ahead do seem to be tough and only tough and robust businesses will survive.

Nevertheless, we ran up some calculations and found that there is some correlation between overall market PE levels and return which you can expect to earn over a 3 or 5 year period. Table below shows the same and is quite self explanatory –

15 year Analysis of Indian market’s P/E Ratio (1999 – 2013)

To summarize, lower the overall PE levels of market, greater would be your return over a 3 year or 5 year period.

Assumptions – This analysis is based solely on Nifty’s past data. Same may not be repeated in future. But chances of repetition are quite high. Returns offered by individual stocks may wary quite a lot from this data.

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Last 5 Years, Next 5 Years – A small study on Indian Stock Markets

Everyone interested in stock markets these days has following perception:–
Markets have not done anything in last 5 years. The index has not moved anywhere at all!!
And that is true. Numerically speaking, markets seem to have done almost nothing in last 5 years (2008-2013).
Now it seems sensible & obvious that one should buy low and sell high. But what should one do when markets have not done anything substantial in last few years? And we are not talking about individual stocks here. We are talking about broader markets. The indices. Individual stocks can take an altogether opposite trajectory than the market.
To answer this question, we decided to look back into the past. We analysed Nifty’s data for last 22+ years (1990-2013). We checked this data for two things:
  • Returns during last 5 years (for everyday since 1995)
  • Returns during next 5 years (for everyday till 2008)

And what we found is summarized in table below –
 

Returns in last 5 Year – Returns in Next 5 Years – Correlation

What the above table means is that – “If returns of last 5 years are not great, chances of having great returns in next 5 years are pretty high.”
Now that should bring a smile on faces of those who keep cribbing about poor returns in last 5 years. 🙂
So will the market give stellar returns in next 5 years (2013-2018)? The answer is that we don’t know. But as per historical data, chances are quite high.

So, will you take chances now? Will you go ahead and invest for next 5 years? What will you do?

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