Anybody with even a slight interest in the equity markets will know that there has been a party going on in that arena for the last couple of years. With every passing month, the noise decibel has been only going higher. There was a small interruption on June 4 post the election results but it seemed that the cops had turned up to see if all the approvals for the party were in place. And after the cops left the venue, the emboldened party goers went into a frenzy.
What do the valuations look like ?
I tried to compare the historic Nifty PE valuations with the current valuations to gauge the margin of safety. As per this note, it might not be prudent to rely on that comparison since NSE switched the earnings calculation method in April 2021.
Standalone versus Consolidated: NSE published standalone PE for the NIFTY up until March 2021. Starting April 2021, they switched to using consolidated earnings to calculate the NIFTY PE ratio. Therefore you see in the table below, a dip from 40.1 in March 2021 to 32.7 in April 2021. This means the NIFTY PE ratio now is not directly comparable to the PE ratio before April 2021. Any analysis that draws a relationship between historical returns to prevailing PE ratios can't be directly be applied to the current NIFTY PE Ratio.
[Source : Capital Mind]
So, I will leave it at that and look for some other signals.
Let's, look at the IPO subscriptions. Promoters are most knowledgeable about their businesses and they know the right time to cash their chips. Read this and this. Opportunistic promoters are taking money home by selling shares while the exuberant investors, particularly the small investors are falling head over heels while deploying their money in the stock market.
Another signal is the sheer number of first time investors who are entering the market. These investors have not experienced any sustained bear market and they don't know how stomachs churn when stocks fall down by a large percentage. In the past few months, I received hurried calls from a couple of my friends (who are very successful businessmen but have no clue about the stock market) to understand how to invest in stocks. Their enthusiasm makes me nervous and I don't think I was successful in tempering it.
The last signal for me is the lack of margin of safety in the valuations of businesses I like and would be open to investing. Since the valuations are not in my favour, I have no other option but to wait.
How long will you wait ?
I look for businesses that (1) I understand (2) earn an attractive economic return (3) are run by quality managements & (4) are available at a reasonable price. I will not invest till ALL the above conditions are met. I have been waiting to make an investment of a significant size and the current valuations are making the wait longer. I am prepared for that and sincerely hope that my clients are with me on this.
If you don't invest, what do you do in the mean time ?
I show everyday at my work with enthusiasm and remember Prof Donald's Sull's idea of active inaction. "Inaction does not have to mean that nothing is going on. When troops are not in battle, they keep themselves in a state of active preparedness." I am trying the same.
I read up on new businesses, review the existing ones, exit the ones which I think were a mistake or are not as good as I thought earlier.
Are you making a market forecast that the market will fall substantially ?
No, I am not. I am also sure that nobody can forecast that. All I am saying is that multiple signals have turned yellow and risk reward is not favourable. Hence, it is prudent to be cautious.
What does Rapper Badshah has to do with all this ?
All work and no play makes Ankur a dull boy. Since I don't want this note to be dull, I will end this with a groovy & peppy number by Rapper Badshah "Abhi to party shuru hui hai"
He says in the song :
Baad mein na kehna, pehle hi de doon warning
party chalegi till 6 in the morning....
I know the party is on. I don't know if it will go till 6 in the morning. But I think there is a high chance that whenever it ends, it will result in a bad hangover.
