I am going to list down some facts, assuming they are, since most data came from the NSE website. We can argue, and draw our own conclusions based on this data.
The long past years
Nifty started with 890.80 points on 1 January 1999, and its values at the beginning of each year have been showing an upward slope. I have ignored intermediate values to avoid clustering. As of 1 January 2015, it was at 8284 points. For an easygoing but rational investor, it would mean a return of close to 15% annually, beating probably most of the professional (institutional) advisers. It's far better not to let someone else control our affairs, finances in particular. .
Earnings of Nifty grew every year too, except for 1999 and 2009. The annual growth in earnings over the period was 10.73%. Not bad when we had at least five years of bad governance.
In fact, 2003-2005 were the best years of earnings growth. After a not-so-good 2013, we had a much better 2014, and now, we can only hope that corporate earnings will be able to sustain a decent growth rate in the coming years.
Of course, we had a high interest rate (and inflation) environment in the past. This has the effect of giving on one hand (higher growth) and taking from another (higher cost of capital). I don't like to give ceteris paribus propositions, which look nice only on research papers.
Return on equity has been in the range of a low of a little less than 16% and a high of a little over 25%, and a little less than 19% on average.
We have a return of equity of about 16.49% now. Based on the fundamental variables, we can also have implied growth calculations; heck, when compared to the actual growth, they invariably vary.
For the sake of pricing estimates, I also list the PE ratios over time. As of 1 January 2015, we had a PE of 21.16, against a long term average of 19.20.
What do they tell us
What conclusions do we draw from these values is debatable. However, my take is as usual. I don't like to rely on market pricing as a tool for business (intrinsic) valuation; although, for buy-or-sell decisions based on price-value comparisons, pricing aspect cannot be ignored. However, I like to challenge market pricing variables, and ask whether these are justifiable. Intrinsic valuation, though, is based on estimates of cash flows, growth rates, and risk involved, none of which can be estimated accurately. For that reason, it is only easier to check market estimates to assist in decision making. It is possible to keep all variables, but one, constant, and challenge that implied variable. I find growth rates in the case of individual businesses, and equity risk premiums in the case of the entire market (index) best suited for questioning, though.
What conclusions do we draw from these values is debatable. However, my take is as usual. I don't like to rely on market pricing as a tool for business (intrinsic) valuation; although, for buy-or-sell decisions based on price-value comparisons, pricing aspect cannot be ignored. However, I like to challenge market pricing variables, and ask whether these are justifiable. Intrinsic valuation, though, is based on estimates of cash flows, growth rates, and risk involved, none of which can be estimated accurately. For that reason, it is only easier to check market estimates to assist in decision making. It is possible to keep all variables, but one, constant, and challenge that implied variable. I find growth rates in the case of individual businesses, and equity risk premiums in the case of the entire market (index) best suited for questioning, though.
Market's own estimates, and its signals to us
Given the information on earnings, reinvestment rate, return on equity, growth rate, and the government bond rates, we can calculate the equity risk premium implied in the market price of the index. The higher the premium, the higher the comfort level in buying, and vice versa. From an outside point of view, this is what I see:
Given the information on earnings, reinvestment rate, return on equity, growth rate, and the government bond rates, we can calculate the equity risk premium implied in the market price of the index. The higher the premium, the higher the comfort level in buying, and vice versa. From an outside point of view, this is what I see:
The lowest equity risk premium implied in the market was in January 2000 implying that market prices were expensive compared to the fundamentals, and the highest was in January 2009 suggesting that prices were least expensive. On 1 January 2009, the Nifty was at 3033.45 points, which would have given an annual return of 18.23% by now. Instead, if bought in January 2000 and held on to it until today, the annual return would have been 11.62%. In January 2011, the markets were expensive again with the second lowest equity risk premium, and would have given an annual return of 7.70% as of now.
As I see it, the index buy and sell decisions across the past years could have been made based on the information, which was available to us at each point of time.
I wouldn't want to buy into the market at these levels is obvious to me. For those who have a systematic investment plan, it is a simple process; but, for higher returns, having a look at what market prices are telling us is worth it. If there is significant cash to be committed, this may not be the time.
Markets will correct to the levels we would like it; however, for that to fructify, we need the right behavior: shun greed, fear and envy, and have patience.
Sustained business profits are not made in a short time, but over a long period.
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