Markets have been crashing all over.
We can probably talk more freely about one market than other. Nevertheless, I know for a fact that in the short term, markets make a lot of mistakes; call it irrationality, rather than efficiency; yet, in the long term, they reason, and prices move towards value.
Therefore, before we ask ourselves what to do with the current markets, we should take a deep breath, if that's what makes us more comfortable, and then ask whether there is any value here. Value is driven by cash flows, growth and risk in those cash flows. So we should ask whether any of the events taking place at the moment would have a long term impact on cash flows, growth and risk. Generally speaking, when we talk about the broader markets, short term events do not have the tendency to impact long term events; that is to say, generally in the long term, markets move upwards because corporates and countries grow.
Considering this, investors can continue their periodic market (the broader index) buying operation; for not-stock-pickers, this should not be stopped in any event; they should continue this activity irrespective of market levels. However, when it comes to individual stocks, it is a different matter. The investors need to work on the long term economics of the business and its capacity to generate excess returns over long term. When they find significant gap between price and value, they should act with meaningful amounts.
Considering this, investors can continue their periodic market (the broader index) buying operation; for not-stock-pickers, this should not be stopped in any event; they should continue this activity irrespective of market levels. However, when it comes to individual stocks, it is a different matter. The investors need to work on the long term economics of the business and its capacity to generate excess returns over long term. When they find significant gap between price and value, they should act with meaningful amounts.
Let's come back to the broader markets again. Apart from the periodic index buying program, can investors buy into indices given that they are falling? The so-called experts have been doing the talking, since they like talking, asking either to sell for the fear of coming bears, or to buy for the pleasure of getting bargains. I wish they had sat quietly at their home and executed those orders for themselves, and made themselves richer; I guess, they are too scared to do that. Prediction is a game nobody is good at; yet not many are able to accept this fact; they want attention and activity in their life.
For the moment, let's check out the Indian markets. How good or bad are they for an investor? Both Sensex and Nifty have had a free fall since the last week of August 2015. On 3 Aug 2015, Nifty was at 8543.05; and on 1 Sept 2015, it is at 7785.85; this is a fall of 757.20 points.
In the usual talking terms, Nifty is trading at a PE of 21.57, PB of 3.13, and dividend yield of 1.52%. Current PE multiple is definitely higher than the long term average, although it has not reached the previous highs.
There is another variable that we can use to check where markets stand, and that is the equity risk premium. Based on this, although it is better priced than July 2015, I find that current market level is one of the expensive ones on historical terms. Of course, that it is not like Jan 2000 and Jan 2011 is a consolation.
In short, I would not want to make significant investment at current levels. I would like to see the fall of 757.20 points in the right perspective, i.e. an 8.86% fall; and it is not good enough to invest other than on a periodic index buying program.
In the usual talking terms, Nifty is trading at a PE of 21.57, PB of 3.13, and dividend yield of 1.52%. Current PE multiple is definitely higher than the long term average, although it has not reached the previous highs.
There is another variable that we can use to check where markets stand, and that is the equity risk premium. Based on this, although it is better priced than July 2015, I find that current market level is one of the expensive ones on historical terms. Of course, that it is not like Jan 2000 and Jan 2011 is a consolation.
In short, I would not want to make significant investment at current levels. I would like to see the fall of 757.20 points in the right perspective, i.e. an 8.86% fall; and it is not good enough to invest other than on a periodic index buying program.
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