Markets – equity or otherwise – exist because prices can go up or go down. How would it be if markets could never go down? People will pay an infinite PE – there is no risk of loss= and hold permanently for the rest of their lives. Like PPF. Since there is no default risk in PPF, if there was no upper limit, people would put an infinite amount and sat out the risk.
The most important thing we need in the market is risk. Once in a while jokers like Alan Greenspan can come and disturb the market. He had a permanent put on the market and made sure that Dow had a PE of almost 40…and Nasdaq had a PE of almost 100. Not sure about how many of us remember the 1990s when this shit was happening.
Market needs risk. The risk that markets can fall is the reason why it goes up. The fact that it can fall – based on logic – not Alan Greenspan clones is the reason why it goes up. No Indian Minister or RBI have ever tried ‘Holding’ the market. They may have tried holding or crashing the US $ vis a vis the Rupee, but not tried manipulating the market too much. Those who try normally fail in the long run. Look at the American markets today – IT HAS TO GO DOWN. Can’t sustain this one sided rally. Of course it is partially because the world believes that cash has a negative yield. So buying an asset (any asset) makes more sense. Any asset means other than bonds, of course.
Alan Greenspan had the following beliefs:
- there is not reason for the market to go down
- market will move to 100,000 to 500,000….it can’t go down so infinite PE?
- people will sell only when they need money
- company performance will not matter !!! prices can’t go down…
For any market to function greed, liquidity, fear…are all necessary. The only reason why people don’t give infinite PE is that they know that somebody will SELL based on company performance. Young investors and those investing for the long term should rejoice when fear is more powerful than the other sentiments. Pricing is better when fear is the dominant factor. It is fear that also holds back the market from reaching dizzying heights. See the auto and pharma industries – people have no clue how to price it. One day they will wake up and see that they were giving in to a lot of fear. Exactly opposite view on the BFSI price earning ratio. Anybody who believes that companies deserve a PE of 30 for growing at 8% seems to be hallucinating. BTW go and do some research on the profit margins of the BFSI. It is mind boggling. Hence the PE? wait till an Aha moment shakes the pe.
I have no view on the market. It is in great shape. As always some companies are too expensive and some are well priced Frankly I do not see anything priced for me to drool. Right now I am afraid to invest, but I have been a successful trader for the past few years..where putting more money meant more ultra short funds or funding margin operations.
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