Skip to main content

Why Investors Failed to Make Money in Last Decade

Image
By

"You only have to do a very few things right in your life so long as you don't do too many things wrong" - Warren Buffett

History offers references and provides basis for creating theories to help decision making in future when facing similar conditions. So does the stock market history. Analysis of stock market movements considering various parameters – fundamental or technical, provides basis to create investment theories to help analysts & investors reasonably estimate the future and take investment decisions.

The mistake we generally make, we dive deep into history for seeking references and tend to ignore recent past, it’s events and movements. The most asked question with respect to investing into stock market is about its valuation and if this is the right time to invest now or I should wait for some time.

To check if the markets are fairly valued or otherwise, analysts use various parameters like market cap to GDP ratio or price to earnings ratio (P/E) or price to book value (P/BV) or dividend yield and few more. The most commonly used parameter on standalone basis and understood by even common man, is market PE.

Based on over 100 years of stock market history especially of developed markets, markets trading at PE of 20 or below are considered to be fairly valued and above it is usually considered as overvalued, heated, costly etc. If the market PE rises above 25 it is considered highly overpriced and sometime it is regarded to be in bubble zone.

As discussed many times before that we are living in a highly dynamic and constantly changing age. And while studying history to take cues for the future, we generally ignore recent history. Things are changing very fast and so should be our parameters.

Whether the current markets are in overpriced zone and waiting for bubble to burst or if they are reasonably priced, we considered recent history of Indian markets of last decade represented by Nifty 50. Remember 10 years also, is no small period to analyze and draw inferences. Following are the month wise PE levels of Nifty - the most prominent Indian index


Of the last 120 months only for 7 months nifty traded below 20 that is only 6% of the times. Or we can say based on traditional theories, 94% of the times Nifty remained in overvalued zone. Consider a situation an investor following traditional wisdom, would have stayed away from stock markets all through this period. Just imagine how much opportunity s/he would have lost of making money from there.

When we further dived into this data, we found 55% or for 66 months nifty PE remained between 20 & 25 and for 32% or for 38 months it traded at PE ranging between 25 & 30. And if we consider yearly closing PE then nifty has never traded at PE below 20 since 2014 or over last whole decade. Current PE for nifty is 22.81.

So we can see that we need to rework our theories and the levels of new normal for market PE. It can now be reasonably assumed that markets are not overpriced but are still within comfort zone as long as they are trading below 25-26 PE. A reason for this is – world’s best performing economy and big domestic money chasing stock markets.

Equity AUM of mutual fund industry alone is more than Rupees 20 lakh crores. SIPs alone contribute more than 17,000 crores every month now. And that is the reason that despite 2.5 lakhs crores withdrawal by FIIs between October 2021 and March 2023, didn’t make much impact on Indian stock markets.

In our last article “Confused or Convinced”, we gave many fundamental reasons to be bullish on Indian markets. And this though small but enough technical analysis, should comfort you to be bullish on the Indian stock markets. So plan your investments wisely, not to miss the father of all bull markets that is in the offing.

And never forget two golden rules of investing which are (a) always follow your asset allocation and (b) never run out of cash. And a word of caution – corona has started raising its head again. Though world has moved much past corona, still we can’t rule out its threat not only on humanity but on economics also.

Call your InvestmentMitra to review your portfolio and take necessary action, if any. You may also drop an email to info@investmentmitra.com for your queries or whatsapp on 9958447700.

Thank you.

Happy Investing!

Team InvestmentMitra

Comments

Post a Comment

Popular posts from this blog

This Republic Day Write Your Own Financial Constitution

By
“Constitution is not mere a lawyer’s document, it is a vehicle of life and its spirit is always the spirit of Age” – BR Ambedkar A constitution primarily is a document that details the rights, obligations, privileges, duties and responsibilities of the people living within the corridors of, and leading that country. It details the rule of governance. Without a constitution it will be difficult to live like a civilised society. We would be living like in stone-age where “Might was Right” and jungle raj prevailed all over. Like a country, each individual should also have his or his family’s own financial constitution detailing various financial objectives and the process to achieve those financial objectives, rules that will govern the way its finances will be managed etc. This applies to all individuals without exception and is more popularly known as “Financial Plan”. Like a constitution your financial plan should have a Preamble and different schedules. Preamble -...
Post a Comment
Read more

Time or Timing – What is more important with Sensex @ 64K

By
  The Stock Market is the device to transfer wealth from the IMPATIENT to the PATIENT. After swinging in a range for almost one and half years, markets breached their previous peaks and are scaling new one now. Markets have risen by almost over 14% in last three months. Major reason for this sudden rise is the return of FIIs to the Indian stock markets following the fact that India is the fastest growing economy and growing over 6% despite covid, global economic slowdown and geo-political tensions. We invest for long term and everyone knows in the long run markets will go up irrespective of intermittent shocks like scams, dot-com bubble, Lehman crisis, covid or banking troubles in USA etc. Following picture depict the journey of Sensex over 40 years since its inception.   Source; www.thenwsmen.co.in The unfortunate part is we are more concerned about the short term movements of the markets. Every time there is sudden rise or fall in them market we are gripped more by f...
Post a Comment
Read more

On Cross Roads

By
“We cannot truly plan, because we do not understand the future- but this is not necessarily a bad news. We could plan while bearing in mind such limitations. It just take guts.”- Taleb:   Propounder of The Black Swan theory. Pessimism that set in March, still persists in our minds. In fact it has deepened with growing number of Covid cases being reported. The largest question ruling our minds today is - Shall we ever be able to overcome it…………..     and if yes by when and how? Have we ever wondered how have the Indian culture survived for so many thousands of years, how come so many Indians who were transported as labourers to many African and European countries centuries ago are now ruling the roost or how come most of the top 20 firms in the world have Indian heading them and so on……….. The only reason to above and many such questions is our “ Ability to Adapt ”. We are fast learner and very quickly adapt to new situation. Indians enjoys six different we...
3 comments
Read more

Markets Tumbling, Recovering – What to do??

By
Markets Tumbling, Recovering – What to do?? "The best time to plant a tree was 20 years ago. The second best time is now." - Chinese proverb. In times like present most people flock towards safety. Most do it because they don’t know how long this doomsday atmosphere will last, some even feeling like there will be No Tomorrow. But hunger for good returns on our investment never ceases. Kin Hubbard satires, "The safest way to double your money is to fold it over and put it in your pocket." On investment and earning good money from them, Warren Buffet – the legendary investor says, "If I buy a farm, I don't know whether there's going to be drought next year, but I know that there are not going to be 20 straight years of drought, and I know there's not going to be 20 straight years of great rainfall." It is a proven fact that no matter what, in long term best returns come from stock markets only. And as Seth Klarman says, “The stock mar...
1 comment
Read more

Have You Missed Boarding the Bus

By
  "The market does not trade upon what everybody knows, but upon what those with the best information can foresee" – William Hamilton Russia-Ukraine conflict had clouded the stock markets worldwide giving speculations to the talks like possibilities of third world war, Russia heading for deep financial crisis, energy crisis looming large over Europe etc. With Russia-Ukraine conflict seems getting settled and much to the pleasure of Russia – the Super Power, this has now become a non-player for the markets until some significant deviation happens from the present stance taken by all major countries of the world. Present is the world of instant. We want everything instant and so are our reactions. In the age of internetted social life, dissemination of information is highly fluid. And over 99% of these netizens have mastered the art of forwarding such information without verifying if it’s a news, noise or manipulated agenda of some interested parties.   Most economies in...
1 comment
Read more