Let us look at the American markets instead of looking at the Indian markets. The American media has as much noise as the Indian market and they have some amazing stories – many wrong. When you read the media stories, you need to have an amazing ability to read between the lines. If you do not have that…you are in trouble. For example when there is trouble in Kashmir the police is asked to be careful, use rubber bullets, etc. – however in Haryana 30 people were killed in police firing. End of story. 30 lives lost. So if you are reading between the lines you should ask :

how come in Kashmir police firing does not kill people?

how come in West Bengal the police does not even reach the trouble spots?

how come ……

you get the trend right?

The US market has been booming since 2009. Well almost. There has been no great fall and it has been giving positive returns since 2009.

In 2009 we were told it was a bear market rally. Well 9 years later we cannot call it a bear market rally. It is surely a bull market.

Then they said it is a sucker’s rally. It rallied through the sucker’s rally….and more people got sucked in?

Then they said ‘it is because of the excess liquidity in the market’ – but Europe and Japan with far more note printing than USA did not rally.

Then they said….’small investors are buying’ – wrong. The small investor is scared and he/she is actually SELLING equity and buying debt instrument. You can of course argue that the risk in bonds is more. If interest rates go up, bond prices will fall. Should you lock your money at such low rates? I know not.

So if the retail investors are selling, who is buying?

Let us come to the basics of Economics. If one of the factors of production is available, people will use that instead of others. So in a country which has inexpensive labor, there will be less mechanisation. So in India we will employ a man to operate the lift. Or a man to hand out a print out – which the driver is supposed to take from the window….anyway.

So if US cuts interest rates to zero or negative corporates will take that money and do a buy back. EXACTLY what US corporates have been doing. Yes corporates have been buying shares out of borrowed money.

So why is leveraged buying not happening in Europe or Japan? We do not know. If any Journo thought he knew it he would have done a story.

The truth is that individuals are selling and corporates are borrowing. However such change of hands is not enough to create a BOOM in share prices. There has to be good performance and the PE will strengthen…and the rising EPS will take the share price up. Old school. Still holds true. Just changing of hands is not sufficient to create a bull run.  Nice but companies which spend tons on buyback are actually quoting at a discount. So a brainless company like IBM has a commodity kind of a price – the buyback not withstanding. However companies like TESLA which comes to the market very often…is at a PREMIUM. Wipro, TCS, Infosys buyback will not help. The number of shares will go down…and the EPS will improve…but the PE will contract, NOT EXPAND…

Some more myths:

  1. Easy availability of money has caused the boom: WRONG. People do not buy shares just because interest rates are down. If there are no earnings (or expected) price of shares do not go up. Period. Robust earnings are necessary. Falling commodity prices may have contributed to the boom, not just availability of cash.
  2. Low interest rates have pushed people to equities. Again wrong, if people are scared they will not put money in equities, they will prefer to use debt instruments to PRESERVE CAPITAL – if people feel capital is at risk, they will not invest, they will prefer absolute safety of capital.


So when you hear a story…ask for the missing stories…between the lines.


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  1. This is not a reply/comment but could not find any other way to reach you.
    This is to convey and acknowledge my thanks and your influence in my journey. today when i saw my portfolio (mostly mutual funds accumulated by SIP), it touched 1cr which might not be a big deal in many ways but a big milestone for me.
    This would not have been possible with out your blogs.

    as a token of gratitude, i would like to give guru dakshina, 2k-3k i would like to buy a book and gift it to you. if you have any one in your reading list. or kindly advice any other way of transferring funds. i feel little taller now but this is just because you have pulled me a little higher with your advice.

  2. The number of shares will go down…and the EPS will improve…but the PE will contract, NOT EXPAND…

    how PE will contract, NOT EXPAND

  3. ” how PE will contract, NOT EXPAND ”

    a company with 100 shares.
    It made Rs.100 of profits and
    Price of each share is Rs.10.

    EPS = 100 Rs/100 shares = 1
    P/E = 10/1->EPS) = 10

    Let’s say the company bought back 10 shares (this is 10% of the total shares, which in reality will be extremely small % of total float).

    Now No.of. shares = 90
    Earnings (profits) have remained same as before.
    EPS= 100/90 shares = 11.1
    To have the same P/E (=10) the stock price should have moved up to 11.1.
    That is 10% of the price movement. Even in this case, PE remains constant. So, if the price does not move up, PE is effectively contracted.

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