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Maybe you should do what you feel like doing, who am I to give you advice! Sell, don't sell, buy more, buy Aakash for $1Bn, go nuts! Neither of us knows what the future holds and if anyone claims to know the future please let me know the secrets of traveling in the 4th dimension in this dull 3d world! Anyway, If you want to know the reason behind my decision despite the decision going against all the concepts of long term investments, please read on.
(The 'Article is too long, I don't want to read' people can check the current PE ratio of Nifty 50, that's the gist of the article. You're Welcome)
I am all for long term investments and ignoring the small ups and downs in the market. You want to create real wealth? Stop trying to time the market and stay invested for longer periods of time. Stock market is 20% knowledge and 80% patience. With all these learnings safely in my bag, I just tried to time the market yesterday.
We all know about the confusingly amazing returns we got last year. We all are happy viewing all the green in our portfolio and also happily telling it to others to get that external validation dopamine to feel good about ourselves. We are making money, our friends are making money, everyone is making money and we are all making merry. During such cheerful times, If someone gives us an advice of caution we can throw a "just look at my returns dude!! I must be doing something right! So don't come here with your technical chitter chatter. I am intuitively good with stock markets". The problem is that we are SCARED to look at the foundation of our current returns because deep inside, we know that they are astonishingly hollow.
Now, you are free to throw the same line which I just wrote at me too in my comments but let's take a second and talk about just 1 ratio. Let's talk about the PE ratio.. heyyy.. heyyy.. the casual reader, don't close the window just yet. I'm going to simplify it for financial noobs like me, please just try to get through the next paragraph.
So PE ratio is the Share Price to Earnings ratio. For example, let's suppose there's a media company "Taking It slow podcast" (check out the Youtube channel for this company). It's share price is ₹10 and it has only 2 shares in the market and it earns a total of 5 rupees. Since it's total earnings are ₹5 and it has total 2 shares, its Earnings per share become ₹2.5. Which makes the Price to Earning ratio = 10/2.5 = 4!
Don't we just pleasantly surprise ourselves sometimes! We got through 1 whole paragraph of Mathematics just now! I couldn't imagine me doing this even in my wildest fantasies (because I don't actually fantasize about Maths, and if you do, please rethink about the blogs that you follow).
Now back to the PE ratio, a high PE ratio means the share price is high/overvalued - price should ideally come down and vice versa (look at me using terms like vice versa. Next stop 'Hitherto'). This is a valuation ratio and is generally used to understand if a company's share is over/under valued. Every industry has its average PE ratio, for example, the ideal PE ratio for tech companies is higher than for manufacturing companies. When we apply this ratio to the 50 companies of NIFTY 50 and take their average, we get the PE ratio of the whole NIFTY 50! In the last blog, I wrote the word 'securities' to establish my credibility, I'm using a graph in this blog.
There are no hard and fast rules to analyze this PE chart but in my opinion, I consider any value above 22 to be expensive and any value below 15 to be inexpensive. These values might vary depending on who you ask but the fact that will remain constant is that the PE ratio of NIFTY 50 has never gone above 30 before 2020. On 14th January, 2021 it is 39.94!!! Many of us might not realize the magnitude of this overvaluation and just shrug it away as just a 10 point difference. Well, that's your choice but this is a big big big sign of huge overvaluation all across the market. Here's a snapshot of some more data:
This is a tell tale sign of Irrational Exuberance that we've witnessed so many times in our history, be it the tulip bubble or the dotcom bubble. Maybe we're living in the times of COVID bubble (both a social and financial one). The market has 'financially distanced' itself so far away from the ground reality that the foundation of the market is no where in sight. In my opinion, the fear of a crash has started to creep-in in the minds of the investors and the speculators and they are just waiting for a small trigger to set the cat among the pigeons.
The trigger can be as small as the market ending flat on 1-2 consecutive days... tell me again... how much did the market rise in the last two days?
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