Friends, It has been a long time I am writing and the market has been upside down during the period. Arguably one of the worst fall of our life time we saw in current month of October. The fall had been colossal. It may be a subject of endless debate as to what cause this cause of this fall. We can cite multiple reasons like international financial crisis, over valuation. domestic problem resulting from international financial crisis, or etc. One thing I firmly believe that market as a whole knows much more than any individual and therefore price is the best indicator of times to come.
The question haunting most of us is what to do next. Is it the right time to invest or the market will go down further. Frankly speaking right now giving any technical support levels on index will be fruitless as negative sentiments are too powerful to over come any kind of technical support.
So I did one exercises to determine the stress level valuation of Indian markets. I got the data form January 99- October 2008.
The stress case valuation of Indian markets have been 10.5X its TTM EPS and a Book value of 2X. Indian markets have never traded below these levels even during the dot com bust. I be live that Indian corporate are in much better shape and Indian economy is double the size. The gearing ratio is low compared to 99-2000.
Right now Trailing Twelve Months EPS of Nifty is Rs. 235 so my stress case valuation will be 2450. while the book value for nifty is Rs 1250. and it results into a stress case valuation of 2500.
So if we analyze the market historically the markets should bottom out at these levels and this may a good buying opportunity. But before we jump in the well let us understand few more dimensions and risks of the analysis.
This analysis dose not mean that markets will not fall form here. Markets can correct very severely for example in 1929 Dowjones corrected by 90%. From the top of 6150 we have just corrected 60% so this may not be the end of correction.
I believe that the worst case scenario Sensex can fall upto 8000 and 6250 levels. And for long term investor (3 -5 years) that will be once in a life time buying opportunity.
If I analyze the risk and return form here the market may fall down by another 20 to 25 % in the worst case but a investor with five year holding period can see his money doubling or tripling. So the risk reward ratio is at 1:4 or 1:8, which is very compelling.
I don’t expect any sharp recovery. I think price wise correction may be over but we still see time wise correction. I do not mean that a sharp V shape recovery is not possible, We may witness a very sharp pull backs form here but I believe that its better to be prepared for the worst. So I will assume that markets will not move up form these levels for next two years. So the minimum time period I will advise you to invest is Five years.
I will advise you to buy stocks or companies which have very low debt on its books. Compay with high debt to equity ratio. like Aban Loyd, Tata Steel, Suzlon, Unitech, Hindustan Construction are already bearing the burnt.
Buy stocks whose business is not going to be affected by economic down turn. For example One company which comes to my mind is Educomp solutions. I believe this company has got fantastic business model and is available at very attractive price. I think this is a must have company in your portfolio.
It will be better to stick with large cap companies as they will be the first to bounce back in the market. I will choose to invest in Nifty Bees. Its an ETF of Nifty. So by investing in Nifty Bees I am investing in top fifty stocks.
Invest in a staggered way. Don’t invest all the money tomorrow. Buy 25% - 30 % of what you want to invest. If market falls by another 1000 points than buy another 30 %.
Don’t invest all your savings in equities. Equities gives you higher return but with increased risk. so invest prudently and in good stocks. Have some cash and debt investment as per your risk profile.
WHAT CAN GO WRONG FORM HERE.
I think that there is only one scenario in which the markets will remain subdued even after five years form here. Looking at the current geo political situation it may happen that we may face a large scale global war. If I am not exaggerating the results in case such a situation occurs your entire investments in equity markets will washed away.
Although the possibility of this happening is very low and right now there may be no reasons to believe that such circumstance can even exist. But things can change very fast so its advisable to be prepared for any circumstances. I think Gold will be best investment in these circumstances so all investor should have some investment in precious metals like gold.
To conclude I will borrow words form the legendary asset manager Mr. John Templeton. "Equity is the only asset class where people are happy to buy higher and sell lower". So let us not get fooled by the current crash. Markets are not going to close down tomorrow.
And remember the words of another legend Mr Buffet, "Be fearful when others are greedy, and Be greedy when others are fearful," It time to be greedy.
