how attractive is the market?

Europe crisis, US recession and fear of a global meltdown have been the topics of discussion these days. Indian growth rate has been lowered to less than 7% going forward. Market has taken a beating from 20k to 16k as noted below.

Month	Open	High	Low	Close
Sep-10	18027.12	20267.98	18027.12	20069.12
Oct-10	20094.1	20854.55	19768.96	20032.34
Nov-10	20272.49	21108.64	18954.82	19521.25
Dec-10	19529.99	20552.03	19074.57	20509.09
Jan-11	20621.61	20664.8	18038.48	18327.76
Feb-11	18425.18	18690.97	17295.62	17823.4
Mar-11	17982.28	19575.16	17792.17	19445.22
Apr-11	19463.11	19811.14	18976.19	19135.96
May-11	19224.05	19253.87	17786.13	18503.28
Jun-11	18527.12	18873.39	17314.38	18845.87
Jul-11	18974.96	19131.7	18131.86	18197.2
Aug-11	18352.23	18440.07	15765.53	16676.75
Sep-11	16963.67	17211.8	15801.01	16453.76
Oct-11	16255.97	17908.13	15745.43	17705.01
Nov-11	17540.55	17702.26	15478.69	16123.46
9 Dec11	16555.93	17003.71	16142.32	16213.46

The fall has created panic in the market only to fear more fall. But within these parameters, is the market attractive today at this absolute figure?

Does not appear so if we have a look at the following table showing sensex yields over the years.

Year	Open	High	Low	Close	Price/Earnings	Price/Bookvalue	Dividend Yield
1991	1027.38	1955.29	947.14	1908.85	22.3	3.58	1.24
1992	1957.33	4546.58	1945.48	2615.37	36.19	6.35	0.8
1993	2617.78	3459.07	1980.06	3346.06	31.78	4.81	0.98
1994	3436.87	4643.31	3405.88	3926.9	45.45	6.07	0.68
1995	3910.16	3943.66	2891.45	3110.49	23.63	3.81	1.13
1996	3114.08	4131.22	2713.12	3085.2	16.07	3.02	1.5
1997	3096.65	4605.41	3096.65	3658.98	14.45	2.8	1.53
1998	3658.34	4322	2741.22	3055.41	13	2.25	1.8
1999	3064.95	5150.99	3042.25	5005.82	17.35	3.07	1.38
2000	5209.54	6150.69	3491.55	3972.12	24.48	3.81	1.14
2001	3990.65	4462.11	2594.87	3262.33	17.6	2.51	1.83
2002	3262.01	3758.27	2828.48	3377.28	15.22	2.3	2.14
2003	3383.85	5920.76	2904.44	5838.96	15.02	2.49	2.14
2004	5872.48	6617.15	4227.5	6602.69	17.26	3.28	2.01
2005	6626.49	9442.98	6069.33	9397.93	16.21	3.94	1.58
2006	9422.49	14035.3	8799.01	13786.91	20.18	4.75	1.35
2007	13827.77	20498.11	12316.1	20286.99	22.25	5.32	1.1
2008	20325.27	21206.77	7697.39	9647.31	18.22	4.2	1.29
2009	9720.55	17530.94	8047.17	17464.81	18.08	3.42	1.43
2010	17473.45	21108.64	15651.99	20509.09	21.71	3.67	1.12
9Dec2011	20621.61	20664.8	15478.69	16213.46	19.38	3.45	1.3

With 19x p/e, over 3% p/b and less than 2% dividend yield it is far from the investors' market. Sure, there are opportunities at individual stock levels. But overall it could be the platform for traders, speculators and the like.

Take your pick!

market inefficiencies and participants

Modern portfolio theory and efficient market hypothesis propagate that market is efficient as it factors all information available at any point in time; and hence market participants are always rational so that they are ready to accept high risk when rewards are high. Risk is measured in terms of volatility; importance is given to how each asset changes in price relative to how every other asset in the portfolio changes in price. A lot has been written in favour of and against these views. The debate goes on.

I would like to see it in the perspective of business valuation. If we accept these views, it would mean that at all times market valuation of a business is accurate. However, a look at 52-week (this is not a long time at all) high / low prices for any stock would tell us a different story; we see huge discrepancies even in index stocks. Would it mean valuations need to change by the day? If not, is the market fully rational all the time? or perhaps rationalizing those valuations?

If one needs to sight value for money it is to the advantage if one is aware that: 1) there are a number of participants who think that they are always rational and the market is efficient; 2) there are inefficiencies in the market, at least in some stocks, all the time. Inefficiency takes place in the market because of (1) above.

It would be better to devote time and energy to something that is simple and commonsensical than to fancies and complexities such as volatility! Life would then be more enjoyable.